General News Summary

No matter who prevails in the current turmoil in Iran, in the future the world may relate differently to the Islamic Republic. Victory by the conservative forces and the confirmation of the reelection of President Mahmud Ahmadinejad, achieved by brutal repression, may hopefully trigger a harder line against Teheran's nuclear policy and its role as an exporter and supporter of Islamic terror. Success by the dissidents, on the other hand, will be perceived by the world as a probable emergence of a kinder Islamic Republic.

This image may be distorted, Israeli experts point out. The so-called-reformers, including presidential candidate Mir Houssein Mousavi, and the moderate conservatives led by former president Hashemi Rafsanjani, may be dissidents, but are not outsiders. It is what Prof. David Menashri of Tel Aviv University, an Iranian expert, has called “a family dispute.” The protests are led and inspired by people who were part of the regime that has ruled Iran for the past 30 years, and are now seeking not to reshape, not replace, it. The difference between the two candidates, as Tom Friedman of the New York Times has pointed out, is between dark black and light black.

It would be a serious mistake, then, to accept a possible victory by the “reformists” as more than it is: Iran under Mousavi would be likely to push ahead with the drive for nuclear weaponry, continue supporting terror groups like Hizballah in Lebanon and Hamas in the Gaza Strip, and to retain its ambitions for greater influence, by whatever means it might take, in the Islamic world and beyond. This might not be the true aim of the youthful protesters who have taken to the streets, but it is true of Mousavi, “their candidate”.

Triumph of the conservatives would crystallize international opposition to Iran. The U.S. and the EU would be likely to take a tougher line in the dialogue over the nuclear program, and sanctions against Teheran may be intensified.

Very little is known about what is happening – or will happen – in Iran, and much of this scenario is little more than educated guesswork. A new, more democratic Iran under Mousavi or someone else – even though it would still be committed to the nuclear project – might be more open to the West, and willing to strike some kind of deal that would allow, perhaps, for inspection of its facilities without abandoning the entire operation. It's not clear, however, whether such an arrangement would indicate a sea change in Iranian attitudes or be only cosmetic, a cover for Iranian designs against the West and Israel.

Israel had maintained a studied official silence about the goings-on in Iran. But Prime Minister Benjamin Netanyahu, speaking to NBC's “Meet the Press” on June 21, said that the weakness of the Islamic regime had been “unmasked by incredible acts of courage by Iran citizens...They go into the streets, they face bullets and, I tell you, as somebody who believes deeply in democracy, that you see the Iranian lack of democracy at work, and I think this better explains and best explains to the entire world what this regime is truly about," the prime minister said.

Those comments, laudatory as they may be, should not be taken as more than they are. In the cold, hard light of real politics, Israel may well find its own strategic needs, are served by the mere demonstrated events in Teheran.

Cancellation of a scheduled meeting between Prime Minister Benjamin Netanyahu and former senator George Mitchell, President Obama's Mideast peace envoy, was the surest sign of the pressure that the U.S. administration is applying on Israel to make significant moves in the never-ending, more-off-than-on process of negotiations with the Palestinians. According to initial reports, Mitchell called off the meeting, to be held during a visit of the Israeli leader to France, because there was nothing to talk about as long as Israel refused to accept Obama's unilateral demand, made in his early-June Cairo speech, for an end to the internal growth-building activity in the West Bank. Netanyahu later claimed that he had asked for a postponement, so that several “issues and statistics” could be clarified in talks Defense Minister Ehud Barak was due to hold in Washington.

Netanyahu – who in the past had negated the possibility of the creation of a Palestinian state – backed down in what was billed as a major policy speech a week after Obama's Cairo address. In a speech at Bar-Ilan University, he acknowledged Israel's willingness to support the creation of a demilitarized Palestinian State and demanded a Palestinian declaration recognizing Israel as the state of the Jewish people. If these conditions are met, Netanyahu told his audience, “then we will be ready in a future peace agreement to reach a solution where a demilitarized Palestinian state exists alongside the Jewish state."

Obama called the speech a step forward, but there was no movement on the settlement question. According to reports, Netanyahu and his team are now trying to formulate a compromise solution which will on one mollify the Americans and on the other not inflame members of his ruling coalition, for whom settlement expansion – and not just “natural expansion” to accommodate growing families of settlers already in place-- is a matter of faith. Netanyahu was reportedly toying with the idea of a “territorial freeze” to settlement activity, under which settlements would not expand onto more territory or create new obstacles to the creation of a future Palestinian state. After meeting, in late June, with French President Nicolas Sarcozy in Paris, Netanyahu said that it was “possible to resolve the territorial aspect of settlement construction... It is possible to find a formula but this requires good will of all sides. What is important is to enable people to live normal lives and that is what I am explaining to the Americans.”

Is Obama inclined to accept such a formulation? As an extremely popular president with overwhelming support in Congress at a time when the U.S. population is focused on issues other than the Israeli-Palestinian conflict, he has much greater freedom of movement that previous presidents? Will be confront Israel? Unlikely. The option, it appears, is his.

Israelis breathed a sigh of relief on June 8, after the returns of the previous day's Lebanese parliamentary elections showed a victory for the pro-Western March 14 list over a rival group headed by Hizballah. A win by the bloc led by the Iranian-backed Shi'ite Muslim Hizballah would have raised the chances of a conflagration along Israel's northern border.

The Lebanese vote came only three days after President Obama's Cairo speech, in which he reached out to the Muslim world to confront extremism. Israel's Vice Premier and Regional Cooperation Minister Silvan Shalom, a former foreign minister, expressed the view of most Israelis a few days before the voting when he said that the ascendancy of the Hizballah coalition, which encompassed Lebanon's largest religious group, the Shi'ite Muslims, with somewhat more moderate Shi'ite Amal organization and renegade Christian ex-president Michel Aoun's supporters, would endanger both the stability of the Middle East and of the world as a whole.

The victorious group includes most of Lebanon's Maronite Christian minority, Sunni Muslims, and Druse. Its leaders are Saad Hariri, the son of assassinated prime minister Rafiq Hariri, incumbent Prime Minister Fuad Siniora and Druse leader Walid Junblatt.

In early June, Bank Leumi chief economist Gil Bufman predicted that unemployment would rise to 9% by the end of the year, average 8.1% for 2009, and a continuing sharp contraction in economic activity.

The Bank of Israel says unemployment will be 8.5% by year's end, forecasts a contraction of 1.5% in GDP for 2009, and rising expectations of inflation. The anticipated inflation, according to a Citi analysis, stems from the feeling among some investors that the worst of the decline is over, a sharp rise in money supply, as well as a planned increase in Israel's VAT from 15.5% to 16.5% included in the budget passed by the new government in May, which may add as much as 1% to the CPI.

Israel's economy will shrink 2 percent in 2009 as the global financial crisis undermines demand for exports, the Organization for Economic Cooperation and Development said. The OECD predicted a recovery in 2010, with the economy expanding 0.2%. Israel's ports are expected to contract by 25% this year and expand by 2.6% next year, the OECD said, adding that Israel was in a recession, “due largely to high exposure to international trade, but it is being tempered by the relatively mild difficulties in domestic financial markets and the absence of a house-price bubble.

The international grouping of the world's largest economies recommended cutting back on Prime Minister Netanyahu's planned tax cut, to help pull the economy out of recession, because the cut would complicate government efforts to narrow the budget deficit to 3% of gross domestic product in 2011, from 5.5% next year and 6% this year. It predicted that 2009 inflation would reach 2.6%, down from 3.8% last year, and ease to 1.1% in 2010, the OECD said. The government's annual target for inflation is between 1% and 3%.

As the global economy recovers, policy makers should end bond and foreign-currency purchases, the OECD said. The Bank of Israel has been buying government bonds to push down yields and purchasing foreign currency to help weaken the shekel and prop up exports.

The Dalit field discovered in the Mediterranean about 60 km. west of Hadera is expected to contain about 14-15 billion cubic meters of natural gas, according to test drill results released by Noble Energy in mid-April. That was about one-tenth of the size of the offshore Tamar field discovered west of Haifa a few months earlier, but was still commercially viable, Noble said. “Even though Dalit is smaller than Tamar, the discovery of this high quality reservoir adds important natural gas resources for development and gives us further confidence that our geologic model for this region is working well. We expect to begin acquiring 3D seismic during the next several months to supplement our understanding of this basin and the various leads on our acreage," said Charles Davidson, Noble CEO.

Other interest owners in both the Tamar and Dalit fields are Isramco Negev 2 with 28.75 percent, Delek Drilling with 15.625 percent, Avner Oil Exploration with 15.625 percent and Dor Gas Exploration with the remaining 4%.

According to an estimate published in early June by Isramco, one of the partners in the two fields, the cost of developing Tamar and Dalit will be in the $1.5-$3.0B range, including the drilling of wells and the cost of a transportation network to carry the gas to consumers.

Though economic projections are still dire and Israel, like much of the rest of the world, is in the throes of a severe recession, April was a bright month on the Tel Aviv Stock Exchange. The bellwether Tel Aviv 25 index of the top Israeli stocks broke the 800 barrier for the first time since October 2008, finishing the month at 812.3 points and registering an 11.5% increase for the month. Other indexes showed similar gains -- the Tel Aviv 100 was up 12%, the Tel Bond 40 rose by 5.4%, the Real Estate index by 18%, the Financial 15 index by 27% and the Mid-Cap 120 by 13%.

Pharmaceutical giant Roche Holding AG of Switzerland has signed an agreement with the Pontifax venture capital fund to jointly invest in Israeli companies. The arrangement is estimated to involve tens of millions of dollars in investments over a five-year period.

Under terms of the agreement, Roche will first invest in incubator companies and Pontifax's existing firms. Subsequent investments will be in clusters of companies in various sectors and at different stages clinical trials. Industry sources anticipate most of the investments to be in vaccination technology, biomarkers for advanced disease detection, and the development of drugs in such fields as oncology.

Pontifax is chaired by Eli Hurvitz, the former head of Teva, Israel's “Big Pharma.” It manages two venture capital funds and Biomedix Incubator Ltd., which in turn controls two biotech-oriented technology incubators.

The joint venture involves what will be the first direct investment by a major pharmaceutical company in Israel. In the past, Johnson & Johnson has operated in Israel through its own VC fund.

Bank Hapoalim, Israel's largest financial institution, set a fund-raising record in June. The bank completed a NIS 3B (about $750M) month with a NIS 1.5B bond issue to institutional investors. Since the start of the year, Hapoalim has raised NIS 4B (about $1B) from investors in Israel and abroad.

In an article whose tone can best be described as breathless Calcalist, the economic magazine of the Yediot Aharonot, described the exploits and accomplishments of Final Financial Algorithms, a market analysis firm based in Herzliya Pituah north of Tel Aviv. The paper says that the firm, founded in 2001 by Israeli mathematicians Nir Stern-Perry and Noam Kalikstein, has developed an algorithm that it describes as no less than a “money machine.” According to the report – which does not indicate much about the exact technology or who uses it – the algorithm manages to “identify the connections between tens of different parameters instantly, and within several hundredths of a second to price a future contract or option and to close every day with huge profits.”

The article claims that leading brokers have found Final's algorithm indispensable in their businesses. “J. P. Morgan treats it like a god,” it quotes one unnamed informed source as saying. Another, also anonymous, is quoted as saying: “Every broker, whose dream it is to find an investor who has solved the markets, knows that if Final were to stop working with him he is likely to reach the point of collapse.”

The article claims that Final started operations in 2005, making a $60M profit, and that profits crossed the $100M mark in 2007. It said that Final's algorithm is not used on the Tel Aviv Stock Exchange because it only works on large markets, and that it is now responsible for 20% of the trading volume on the Frankfurt Stock Exchange. Short of the mere news story, there is no verification, no real statistics, no confirmation by anyone but the writer.

Mergers & Acquisitions

Elbit Systems in April completed the purchase of Kinetics of Airport City, near Ben-Gurion International Airport. Elbit paid $110 for 49% of Kinetics, after previous acquisitions of 34% in 1998 and 17% in 2000. Kinetics and its wholly-owned U.S. subsidiary Real-Time Laboratories, LLC., develop and manufacture systems in advanced life support and environmental control fields, including climate control systems and biological and chemical protection for combat vehicles. It also develops and manufactures hydraulics, fuel, braking and suspension systems, auxiliary power units for land vehicles and hydraulic systems for aircraft. Kinetics' main customers are in Israel, Europe and the United States.

French businessman Patrick Drahi apparently is still interested in Israel's HOT cable and telephony operator. In early May, Drahi, who in the past was chairman of UPC, a European company that held 48% of HOT before it went bankrupt a few years ago, purchased Bank Leumi's 15% stake in HOT for a reported NIS 381M (about $99M). According to the Globes, Drahi in early June paid First International Bank of NIS 65M for 2.5% of HOT, and has negotiated with the Delek Group, which owns 16% of HOT, and other shareholders Bank Hapoalim (5.8%), the Yediot Aharonot group (16.8%), and Eliezer Fishman, owner of Globes (11.1%).

Elbit Systems acquired a minority stake in Soltam, the maker of artillery, artillery ammunition and a variety of other products including kitchenware, according to a report in the Globes in late May. The possibility of a deal arose after Soltam, based in Yokneam near Haifa, reported problems of liquidity.

Drug-maker Johnson & Johnson in late May announced an agreement to acquire cancer drug developer Cougar Biotechnology for about $970M in cash in order to strengthen its oncology business. William Hait, J&J's global therapeutic head of oncology, said that developing new revolutionary treatments that could change the course of cancer treatment by targeting the tumors could make a difference to the lives of millions of patients worldwide. Cougar has two clinical trials in progress – one on patients with metastatic, castration-resistant prostate cancer who have progressed after docetaxel-based chemotherapy has failed and a second involving men who have yet to receive chemotherapy. Its research team is headed by former Israeli Dr. Arie Belldegrun, who after his medical training in Israel worked at the National Cancer Institute and the National Institutes of Health in the U.S.

High-technology exports rose by 15% in the first two months of 2009, after declining by 6% in the last quarter of 2008, according to statistics published by the Israel Manufacturers Association. The statistics include a 50% rise in aircraft exports, 13% in pharmaceuticals, and 4% and 5% respectively in electronics and telecommunications components.

India's Tata Teleservices signed on deals with three Israeli infrastructure providers in late spring and early summer, acquiring wireless networking equipment worth a total of about $200M.

Wavion Wireless Networks, of Yokne'am Illit not far from Haifa, will supply and provide WiFi networks for small businesses and residential buildings in Mumbai. Meanwhile Wavion, whose main investors include Israel's Elron and BRM investment firms, reported that its revenues over the past five quarters have increased at a quarterly rate of 65%. The developments, according to a report in the Globes, are particularly significant in light of the fact that Wavion, in financial trouble three years ago, changed its management and shifted its production emphasis from home networking to wider networking solutions.

Tel Aviv-based Ceragon Networks, a leading provider of networking hardware, said in early June that it had received a follow-up order from Tata Teleservices of India to support the expansion of Tata's GSM network to seven new communications circles covering a population of nearly 400 million. Value of the deal was not announced. The order follows an initial deal signed by the two companies in mid-2008. In all, Ceragon equipment will be used by Tata in 10 areas in India, including the Delhi Metro area.

And finally Israel's ECI Telecom won a $70M contract by to deliver fixed-broadband access network across the country for India's Tata Teleservices Ltd. (TTSL). ECI already provides TTSL with a similar service in other Indian localities, including Hyderabad, Bangalore, Delhi, Ahmedabad, Vizag, Vijayawada, Surat and Baroda. The broadband solution will enable TTSL's offering of a wide range of services and applications, including IPTV, video on demand, high speed broadband Internet, VoIP and other bandwidth-intensive applications. During five years of Indian operations, ECI has provided network infrastructure solutions that include wireless backhaul, backbone for WiMax, broadband access and transport.

Tel Aviv-based Alvarion, which provides WiMAX and non-WiMAX wireless broadband systems to carriers, Internet service providers and private network operators around the world, has signed its biggest contract ever – a $100-$150M deal for WiMax wireless communication equipment to a U.S. government-sponsored project designed to create a WiMax network for 6 million residents in an area spanning 17 states and 546 rural communities. The five-year contract, announced in early June, is with American broadband operator Open Range Communications. Alvarion's largest contract to date was valued at $556 M.

Meanwhile Ceragon Networks, another Israeli company in the same field, reportedly was negotiating a deal valued at tens of millions of dollars with Open Range. Ceragon reported first quarter revenues of $43.9M, down 7% from the parallel quarter in 2008.

Amdocs Ltd., a billing software developer based in St. Louis, Missouri, and Ra'anana-Kfar Saba in the high-tech belt northeast of Tel Aviv, has signed a six-year agreement with Finland-based telecommunications company Elisa Corporation. Estimated value is tens of millions of dollars.

Amdocs has supplied billing, ordering, and customer relationship management (CRM) software to Elisa since 2007. The current deal expands the relationship, and under the managed services and billing consolidation agreement, Amdocs will now assume responsibility for day-to-day management and maintenance of the software deployed to support Elisa's wireless operations. In addition, Amdocs will consolidate Elisa's eight legacy wireless, wireline, Internet, and cable billing systems to establish a single, convergent billing system.

Israel's defense exports are likely to hold steady at about $6B, according to a report in Calcalist. The report, quoting Defense Ministry sources, said that exports in the first half amounted to about $3B, and that a similar sum was predicted in the remainder of 2009. If the assessment proves true, Calcalist pointed out, defense will be just about the only Israeli export branch not to have suffered from the world economic crisis. But, the paper pointed out, the world downturn had affected the way export business was conducted, including the terms of payment, the difficulty of negotiating new deals, and the level of competition for new contracts.

Elbit Systems president and chief executive Yossi Ackerman predicted double-digit growth for the defense contractor in mid-May, when presenting a strong first quarter report. In the first three months of 2009, Ackerman disclosed, Elbit registered a 34% growth (over QI/2008) in profits and a 6.6% sales increase, on total revenues of $657M. Much of the increase came from higher sales of unmanned aerial vehicle and communications equipment. Much of the rosy outlook, Ackerman said, came from increased interest in unmanned systems, and prospects for increased sales in this area to the U.S. defense establishment via a joint enterprise with General Dynamics.

A few days earlier, Elbit announced that it has won a $197M, five-year contract to supply fire control systems to the U.S. military. And in early May, VSI, a joint Elbit-Rockwell Collins venture, took a $120M contract for 550 headpiece systems for 550 Boeing aircraft in the U.S. Navy and Air Force, while Elbit itself got a €25M contract from Iveco, a Fiat subsidiary, for 12.7-mm. weapons stations to be provided to the Austrian military.

Government-owned Israel Aerospace Industries' (IAI) revenues grew to $3.6B in 2008, up 9% from the previous year, but its profitability was negatively affected by the weakness of the U.S. dollar. Profits were $91M, down 23%. At the same time, the outlook for the future remained relatively secure, with the orders backlog reaching $7.1B.

Elbit/IAI's Elisra subsidiary in mid-May was awarded a $55M contract for electronic warfare systems with Lockheed Martin Canada, which will install them as part of an upgrade of Halifax model vessels in the Canadian Navy.

U.S. defense officials have informed Israel that Washington will provide full funding for development and production of the Arrow 3 anti-missile defense system, according to a May 21 report in the Jerusalem Post. The paper said the Americans in mid-May had informed a delegation to Washington headed by Defense Ministry director general Pinhas Buhris of the decision. Participating in the U.S.-Israeli military dialogue, in addition the Buhris, were outgoing Israeli Ambassador to the U.S. Salai Meridor and Maj.-Gen. Benny Gantz, the Israeli military attaché; Deputy Defense Secretary for Policy Michelle Flournoy led the U.S. team.

Israel had been concerned that the Arrow development costs, estimated at upwards of $100M for the coming year, would be affected by cuts in the U.S. Defense budget instituted by Secretary of Defense Robert Gates.