Tuesday, December 26, 2006

The business of war, the war of business

Israel is a place full of conundrums and contradictions, not least when it comes down to commerce. I am privileged to do business with some of the country's finest, as well as a plethora of wealthy and staunchly Zionist Diaspora Jews.

Some interesting thoughts have occurred to me in the past couple of weeks, as I am in the middle of constructing a deal between an Israeli investor and an Irish property development group. I have especially enjoyed the wonderful way in which Irish blarney has met Israeli chutzpah at the meeting table.

One outcome is that we decided to set up an Israeli-Irish venture (in the words of the Irishman, "imagine the trouble we'll be in when we get Israeli blarney and Irish chutzpah", and the Israeli response of "do they do Gaelic-Ivrit dictionaries?"). This would compete with Candy & Candy, and we all agreed should therefore be called Sukariah & Milchon. Make use of said Gaelic-Ivrit dictionary to translate that one...

On a serious note, what I have found from negotiations with Israelis (and the words of warning from my Tel Aviv & Jerusalem relatives about not wasting effort trying to do business there) is that there is a zero-sum attitude. If he gets a win out of it, then by definition I have either lost or at least not won by as much as I could have, which for me feels like a loss. So the objective of any business deal is to ensure I not only demonstrably come out on top, but that my adversary knows he has been squashed like an Iranian nuclear reactor (oh, that's next year's simile of choice, sorry).

This makes for a rather aggressive and uncomfortable final round of negotiations, a far cry from the jollities of breakfast meetings at the Cinnamon Club (the only place in London with a kedgeree even close to a par with Freedman's own). Ultimately, it also destroys trust, removes any possibility of repeat business (especially when the non-Israeli firm has been screwed so far into the ground it might go bust), and more often than not simply blows the deal anyway. Then the Israeli has also missed an opportunity - but at least gets to boast about how stupid the other guy was and how badly it will all work out for him for not taking the deal on offer.

Now Israeli business uses this skill to grab the second spot in the whole world as a hub for venture capital investment. In that market, it is predatory and the idea is either to ruthlessly exploit companies in distress or undervalued, or to seize total control of the newbies whilst leaving enough fat in the deal for the PhD'd inventors to feel incentivised to make money for the MBA'd investors.

Even then, there is substantially more money floating around than so-called "good" deals to put it into. This might be in part because non-Israeli companies seeking friendly investment run a mile when the Ramat Gan VC shark comes snaffling in their direction. It's also because everyone in Israel is looking for what elsewhere in the Middle East is called baksheesh but in the Holy Land, where the trend is bizarrely edging towards three-piece suits and ties, it is called "professional fees", "raising charges" or "consultancy".

In English, I call it "backhander" or perhaps more precisely "money for nothing, demanded by lazy, greedy, arrogant, pig-headed men in glass-clad towers, who give Jews in commerce a bad name."

A good example - about two years ago, I had some very brief exclusivity on a £460m piece of commercial real estate in London fall into my lap. After getting some London institutions interested in the deal as the debt providers, I needed to find a nice equity investor but was heading to Tel Aviv for Pesach. Knowing a couple of well-placed Israelis in said glass-clad Ramat Gan skyscrapers, I set up some meetings.

First time lucky, one of them tells me he knows the perfect company to make such an investment, who are on the lookout for trophy buildings in London. Of course, there is the small matter of fees, he says. No problem, say I: there is plenty to go round, I have an agreement for 0.25% of the transaction value (at that time $2m), which I will gladly split with you.

The guy snorted and said he was looking for an introductory fee of 4%, and didn't I know this was typical in Israel? I explained that no introduction was worth $35m to the vendor, so he brought the meeting to an abrupt end and I left.

A year later, I had a similar experience with a lawyer who wanted me to find an investor for a major European football club. Before he could even tell me who the club was or how he was involved in the transaction, I had to sign a fee agreement for 4% (maybe it is typical in Israel, I thought). Now a bit older and wiser, I said I would sign whatever he put in front of me, on the understanding that at a later date, I would take great pleasure in un-signing it.

He asked me what this meant, and I explained that should it become a deal-breaker with the buyer I brought, or if it were to contravene any law or regulation in the UK, USA, Israel or the country where the club was, I would simply rip it up in his face, and they would all have to renegotiate if they wanted to complete the deal.

After picking himself up from under his desk, and having a glass of cold water to get over the shock of a non-Israeli being so brash, he agreed. It later transpired of course that there was a broker chain as long as my mother's Tesco bill, a whole load of indiscreet baksheesh to pay, a football club with no real idea how to run itself or create a viable deal for a solid Western investor, and a whole load of Israelis making everything even more undeliverable through a refusal to step aside and let me do the work.

Irony of ironies on both these deals: the London commercial space later sold for £520m but my chance of making it work had long gone, and the football club remains unsold and sliding into bankruptcy and disrepair to this day.

Compare the confrontational way that Israel does business with the way Israel has come to run its wars. Gone are the days of pre-emptive and ruthless surgical air strikes, land wars conducted swiftly with waves of fast tanks and long-range foot missions, and clever removals of our enemies through exploding mobile phones and car headrests.

Instead what we have is a row of calamitous decisions that are governed by international diplomatic requirements and domestic political pressures before translating into poor battlefield decisions. At the end, we beat our breasts over whether we won or lost, and at all times seek to appease everyone, usually managing to offend them all to some extent.

Israel needs to succeed in war and peace. Hence it is about time it learned that business is NOT a zero-sum game: both sides should come away feeling like they got a win out of it. And more important to their immediate survival, they should understand that war IS a zero-sum game, at least in the Middle East. Whilst Israel clearly did not win outright against Hizballah, it also did not lose militarily.

But that is enough to give Israel's enemies the confidence to come back harder and push their luck further. The ham-fisted methods used, whilst we all know they were manipulated and exploited by the international press and Hizballah, have created many more enemies and caused doubts amongst our allies. So by not winning, I think we can assume to have lost.

The only thing that stands between the Arab world and international isolation is oil. Let's be honest: apart from a handful of enarques in France, members of the Camel Corps in Whitehall, and a few Beltway antisemites, nobody wants to deal with them, and nobody would have a need to if the black stuff ran out tomorrow. A combination of OPEC cartel wizardry keeping the price in a range low enough to disincentivise the search for replacements but high enough to rake in the petrodollars, and the veiled threat by the ruling elites that terrorism could "slip out of control" at any time (ie they can turn a blind eye), keeps everyone face-down in the trough of the Persian Gulf.

The only thing that stands between Israel and international isolation is... what, exactly?

I would argue that a withdrawal of half the world's Intel computer chips, a bundle of the best drugs against cancer and other medical nasties, agricultural knowledge that could make Africa bloom, and stunning women like Bar Refaeli and Natalie Portman, might cause some pretty big problems.

So in the same way as the Arab world has used its grip on oil to protect its relationships with the rest of the world, Israel should look to business as a means of forging links. In the last year, Warren Buffett and Donald Trump have made huge investments there. Ryanair even think it's worth flying in (I can't wait for Michael O'Leary to achieve his preferred 20-minute turnarounds at Ben Gurion, let alone enforce the baggage size policy).

But to do that, they need to show that the country is able to protect itself (and hence any investment therein) robustly and swiftly when attacked, at the same time as showing that it can create win-win situations, both politically and economically with its neighbours, and on a business-to-business level with its international counterparts.

Israel has earned plaudits from its friends for its innovation and industry against staggering odds, and even a grudging respect from its neighbours and enemies. It has paid its dues on that respect many times over. How effectively it invests the balance will determine future yields.


Anonymous said...

Ohhhh, so we only have to apease the west by not killing innocent ppl (aka no more photos of baby bodies), beat the shit out of the arabs fast and swiftly while making them think they won something.
And then making sure our economy blooms and presents a good place of investments for world wide investors...

Sounds nice! maybe after that we can finaly find a way to attach wings to human beings 'cause personaly I'm getting sick of walking....

Come'on.. that's bollox.

freedmanslife said...

I hardly think it's "appeasing the West" to try not to kill innocent people. The key is to present big carrots and big sticks to the neighbours. At the moment, we are presenting coleslaw and cocktail sticks.

And of course we should be making ourselves an indispensable member of the world economy. That's how you get people to defend you - when it's in their strategic (ie economic/industrial and hence political) interest to do so.

Nobody is going to help us just because we're Jews... in fact, usually the opposite.

Anonymous said...

Good to see you posting real posts again! One of these every couple of weeks is all I ask ;-)

Anonymous said...

Notice I wrote "by not killing innocent ppl ".. not by "trying" to.
the IDF is probably the only army in the world that concentrates on NOT hitting stuff more than it does on actualy HITTING targets.

I don't think we lack motivation or skills to make it happen, I'm pretty sure IT DOES happen, our little jewish nation is responsible for ALOT of the world's high tech achievments.
However that alone is not enough.
And I don't need to remind you that not killing innocent ppl while giving our enemies a decent fight is NOT easy, as a matter of fact its almost impossible.
Just today on my way to my UNI, I talked with my friend who actualy just came back from reserve duty, he told me about his "ironic" expiriences from his 3 years of service.
Like watching Hizbollah fighters geting ready to shoot rockets inside Israel, watching them strech the cables, set the gear in place, all nice and calmly but not being able to do something about it 'till they actualy shoot! (I'm talking about prior to the second lebanon war betwin 2000-2006) and only after they shoot Israel had "premision" to respond.

And even with these kind of harsh limits no army in the world can stop the inevitable death of some innocent ppl, 'cause that what war means.. ppl dieing!
This is not a war we can win by economic achievments, nor can we do it by means of war anymore.
This is a war on the media, that's the war we need to win, and at the moment we're lossing badly and I fail to see a way of winning it which deeply deepress me by the way :(

I concure! atleast one of these posts every 2 weeks or so! that's all I ask too!!!

freedmanslife said...

But Ofer, you are entirely arguing my points here! I want to go in and tonk these assholes as hard and ruthlessly as possible. Any civilian damage on their side is their responsibility, provided we have taken all sensible precautions.

Why do we not use the same tools honestly that they manipulate dishonestly? Where is your reservist friend's video footage of the rockets being fired, the pleas for permission to fire back and take them out, and the resultant "no" or a "yes" too late?

The argument I am making for this economic thingy is that there has to be a reason for the world to cut us some slack, something they want to take from us that we can withhold, and most importantly something that gives us self-sufficiency and allows us to build strategic relationships away from the USA, who are increasingly showing themselves not to be trusted as our sole protector. China, India and non-Arab West Africa are the big plays in my view. More anon.

Look out for a pretty controversial posting coming up this week that will make most neo-cons look like Deaniacs. I am a believer in firm pre-emptive action, but it needs the diplomatic, ethical and media battle strategies to be honed and ready to roll AFTER the successful event. More soon...