“This is an opportunity that will not often repeat itself,” he argued, passionately defending the plan’s advocates. “Government policy – ‘the new economic plan’ – aims to increase Israeli exports at any price and will only benefit the citizens of Israel.”
•••
Despite the success of the veterinary plant at Maabarot, Eli understood that to achieve his export goals, Assia needed to merge with another Israeli pharmaceutical company. The other company would have to offer the added value of a relatively wide variety of drugs and products that would enhance Assia’s portfolio. This was the only way he could expand production and exports to achieve significantly greater growth.
Eli was certain of his path, but again ran up against the resistance of Assia’s conservative owners. Although in 1942, at the beginning of its growth and expansion, Assia had purchased the Vita factory building next to the Assia plant in Petah Tikva, the owners had consistently refused to approve any further acquisitions. They preferred to make do with what they already had and, at the most, expand their existing plant. For example, in 1952, they built the Chemonim Aleph plant to produce raw materials for medical chemistry, but went no further.
The partners staunchly opposed some of Eli’s ideas for expanding Assia, while other ideas floundered on their own. Time after time, the process Eli had experienced prior to entering the African market repeated itself. And in the end, as in Africa, he succeeded. Eli finally managed to convince Assia’s owners to merge with another Israeli pharmaceutical company due to the specific company he sought to merge with and the unique business plan he formulated.
There were a limited number of companies with which Assia, then the fourth-largest pharmaceutical company in Israel, could merge. Of the five Israeli companies that produced pharmaceutical drugs and other products, Eli regarded only three as potential targets for merger or acquisition: Ikapharm in Ramat Gan, Zori in Tel Aviv, and Teva in Jerusalem. The other two, Rafa in Jerusalem and Hillel in Haifa, were simply too small.
Teva, the largest of Israel’s pharmaceutical companies, had already gone public; it had been traded on the Tel Aviv Stock Exchange since the 1950s. Negotiating with its owners, Dr. Gunter Friedlander and Elsa Kuver, was expected to be a complex undertaking not only because Eli was not always able to find a common language with them, but also because acquiring a public company was much more complicated than acquiring a privately held one. This led Eli to rule out a merger between Assia and Teva at this stage. He never considered Ikapharm, the second-largest Israeli pharmaceutical company, because he was convinced that its owners, led by Dr. Stephan Elieser Ickelheimer, would either refuse to sell it to the owners of Assia or demand to retain sole control of its plant as a precondition for a merger.
Eli accordingly cast his gaze on Zori, which was similar in size to Assia. He first encountered the Zori plant, which was adjacent to Tel Aviv’s central bus station, years earlier: as a child, he used to stop as he passed it to watch the production of syrups and creams. Its doors remained open during production, which allowed him to observe the stirring of the syrups and the mixing of the creams. Zori had been established by Raphael Horn, Walter Grotto, and Paul Weiss, who were all doctors and immigrants from Germany, in conjunction with several investors who acquired a one-third share in the company. Those familiar with the industry regarded the Zori plant as efficient and well run. Its production lines were new and modern, especially in comparison to those of Assia, and it produced a relatively wide variety of products. Moreover, Zori was already a customer for Assia’s APIs and other raw materials.
Another reason that Eli believed that this “German” company, as Eli referred to it, was suitable for a merger with Assia was the fact that after three decades of working in the pharmaceutical industry, its owners had thrived, but had not cultivated a younger generation to replace them. He suspected that convincing them to sell their share in the company or to merge with Assia would be relatively simple. Assia had a good reputation and when Eli began conducting secret negotiations with them, the owners of Zori were reassured that he would maintain their achievements in the pharmaceutical arena and continue to move forward.
Eli first met with the owners of Zori in the autumn of 1962 in the old plant’s conference room. The well-regarded Dr. Weiss, flanked by Dr. Horn and Dr. Grotto, sat at a large table in the center of the conference room. After a few polite words of introduction, Eli opened the meeting.
“I do not know exactly how much you produce or sell,” Eli stated. “I know how much we produce and based on your raw material orders, I know that you are a smaller plant than we are. How much smaller, I do not know.
“Let’s say that if we are X, you are Y,” he said, producing a working paper reflecting the expenditure structure of Assia and Zori.
“Today,” he continued, “you are barely making a profit and we are barely making a profit. But in this case, nothing plus nothing equals a great deal of money.”
According to his calculations, merging would allow the two plants to significantly increase production and to reduce their combined staff by approximately 80 employees. At the time, Zori had 140 employees and Assia had 180. Even though Eli knew that Assia’s plant was more efficient than Zori’s, he tried to play that down at the initial meeting. Instead, he placed his plan on the table and declared: “I believe that based on the plan I have formulated, a joint enterprise can be profitable.”
“What happens if it turns out that you are worth more than we are?” asked Dr. Weiss, who was an economist by training. “After all, your proposal calls for the equal merger of two plants.”
Eli was prepared for this question.
“If Assia turns out to be worth more,” he assured them, “the difference will be sold to a third party. Assia will be the same size as Zori.”
At the conclusion of the meeting, Zori’s three owners asked for some time to consider Eli’s offer, but it was clear to Eli that they were already convinced. At the next meeting, they agreed to the merger in principle, although it took dozens of subsequent sessions to iron out all the details.
Eli expected that persuading Nachman Salomon and his partners Yitzhak Elstein and Yitzhak Levin would be more difficult than persuading the owners of Zori. At first, Eli did not refer to it as a merger but rather asserted that in order to “swallow” Zori, Assia would need considerably more equity capital than they possessed at the time. However, they adamantly refused to borrow money to fund a transaction, especially one that was so large in scope and that required much more equity capital than they had at their disposal.
“We need to take control of Zori,” Eli reasoned with Nachman. “If we don’t, someone else will. And whoever does so first will profit.”
Nachman listened, nodded his head, and replied: “This is not for us. We are doing fine with our own plant, which supports three families. What do we need more families for?”
It was difficult to argue with such a rational view. The Jerusalem branch of Israel Discount Bank may have been willing to provide Assia with the necessary funds in exchange for mortgaging a portion of its assets, but Nachman and his two partners refused to even entertain that idea.
•••
Eli focused his efforts on formulating a business plan that won over Yitzhak Levin and Yitzhak Elstein, two of Assia’s owners, and eventually even convinced Nachman, who was the most conservative of the three partners. Since Assia lacked the equity capital to buy out Zori altogether, Eli thought not in terms of an acquisition but in terms of a merger and began by procuring the agreement of Zori’s owners. An assessment of both companies’ financial turnover, number of products, and profit figures confirmed that they were indeed the same size. However, in order to maintain control of the company, which was a precondition for Nachman and his partners, Eli decided to bring a third partner into the deal. He initiated negotiations with the Central Trade and Investment Company (CTIC), which later became known as C
lal. Established in 1956, the CTIC was considered the strongest and most influential independent business entity in the Israeli economy at the time – the “splendor of private industry,” as Eli described it. Eli proposed to Avraham Friedman – one of CTIC’s owners, its influential CEO, and the father of a childhood friend of Eli’s – that the CTIC acquire 20 percent of the merged company. It turned out that Friedman regarded Assia and Zori as successful companies and was pleased to be offered the opportunity to join the partnership. At the time, the CTIC was preparing to make its first public offering on the Tel Aviv Stock Exchange and the partnership with Assia would serve as further evidence of its quality and increase its value. Based on Eli’s presentation, and in accordance with the joint company’s value as assessed by Eli in conjunction with the owners of Zori, Friedman agreed to pay 1.2 million Israeli pounds in cash, which was a substantial sum in those days, even for the CTIC.
Since the owners of Zori had no intention of seeking control of the joint plant, their position during the first phase of negotiations was that they preferred to be paid the full value of their plant – 3 million Israeli pounds – in cash. Eli thus needed to find the money to do this. Assia had 800,000 Israeli pounds from independent sources, which, when added to the sum generated by the transaction with the CTIC, meant that Eli had to raise one million Israeli pounds. He decided to pay Zori the balance owed by selling the plant in which they were currently operating, not including its contents. The building’s location near the Tel Aviv central bus station made it relatively valuable real estate. The owners of Zori agreed that until the property could be sold, the contract would only be initialed. After they received the full payment, within a period that was not to exceed half a year, the agreement would become binding. In other words, according to the initial transaction Eli formulated, Assia would receive 80 percent of the value of Zori and would control a comparable share of the joint company. In return, Assia would pay 800,000 Israeli pounds and allocate 20 percent of Assia to the CTIC. Without a doubt, the deal was flawless.
Thanks to subsequent developments, by the time the deal was concluded, the future profits stemming from the transaction far surpassed Eli’s initial expectations. From the beginning of the negotiations with the owners of Zori, both sides understood that after the merger, some of Zori’s 140 workers would retire and others would either quit or be fired and receive compensation for the loss of their jobs. It was estimated that after the merger, some 80 employees would cease working at the company. Eli began negotiations with the Zori employees’ committee to reach an agreement regarding this. Initially, the workers insisted on either retaining their jobs or receiving an increase in severance pay to a rate of 300 percent. At the time, Israeli newspapers were filled with articles and reports on the port workers of Tel Aviv and Jaffa, who agreed to be transferred to the port of Ashdod in exchange for a similar amount in severance pay. The employees of Zori saw this as a precedent and were trying to broker a similar deal, but Eli refused. He steadfastly maintained his position that he would pay no more than one half of this figure and informed the employees’ committee that this was his final offer. The committee did not budge and even declared a sit-down strike with the support of the Tel Aviv-Jaffa Workers’ Council.
Just when it seemed as if they had reached an impasse, Eli was surprised to receive an offer from the committee that he could not refuse. After the merger, all the employees would resign collectively in exchange for severance pay at a rate of 150 percent, as Eli had offered. The employees’ committee’s rationale was simple: in 1962-1963, the Israeli economy was in desperate need of working hands and it was clear that the Zori employees, who were highly skilled, would quickly find new jobs. They also feared that if they continued on as employees of Assia, they could be forced to work in Petah Tikva or Jerusalem.
Eli was pleased by the unexpected offer and asked the Zori employees’ committee for two days to consult with Assia’s employees’ committee regarding whether they could take up the slack.
The next day, I went to Assia and told the employees’ committee: “I would like us to sit down together and roll up our sleeves – don’t ask me how or why – so that we can tell all the Zori workers that they can go home.… I’ll give you some time to think about it. We need to give them an answer in two days.” They gave me an answer then and there: “Go close the deal. We’re behind you.”
After the Assia employees’ committee agreed to replace the Zori workers who would resign after the merger, Eli immediately had to find 540,000 Israeli pounds to cover the severance pay for Zori’s 130 employees (12 employees announced that they wanted to stay on and Eli of course had no objection). Eli met with the owners of Zori, convinced them of the wisdom of the deal he had reached with the workers, and asked them to increase their share in the merged company to 30 percent. This meant that part of the payment for the building by the central bus station could be paid to the Zori workers at once. Eli’s calculations here were astoundingly simple. Since the request for collective resignation and severance pay had come from the Zori workers, he was certain that the Zori owners would not hinder the agreement and would understand that the arrangement was in the best interests of all involved. He had calculated correctly. The owners of Zori agreed to remain in the joint company with 30 percent of their shares and even to join its management. Assia, of course, did not transfer the 800,000 Israeli pounds that were supposed to be drawn from its own sources to the owners of Zori.
After concluding the terms of this complicated deal with the different parties involved, Eli faced the greatest challenge of all: convincing the heads of Assia. By now, he knew them well and proceeded from the easiest to the most challenging. The first person he approached was attorney Yaakov Salomon, Nachman’s brother and a former partner of Yitzhak Levin. Yaakov was pleased by what he heard.
“You know what?” Yaakov concluded. “It’s outstanding!”
He then helped Eli formulate tactics to convince the three owners.
They began with Yitzhak Elstein, who was considered the most moderate and least stubborn owner.
“After I explained the essence of the deal,” Eli later recalled, “he told me, ‘I’m behind you. Do the math and tell me how much it will cost.’”
I told him: “The difference is almost one million Israeli pounds [the amount of severance pay due to the employees of Zori].” He agreed and then phoned Yitzhak Levin, who responded: “Are you out of your mind?! With those Yekkes [a mildly derogatory term for Jews of German origin]? Forget about it!” But Yitzhak knew his partner well. “Calm down,” he said. “Eli will come see you with the calculations and you’ll see for yourself.” Levin was adamant. “I don’t want him to. I’m not interested!” In the end, I went to see him. Levin always treated me nicely. He had a great deal of respect for me, although from time to time he did not like the ideas I presented. I laid it all on the table and showed him the figures. “Are you certain we can reach such a figure?” he asked. “Yes,” I answered. “Are you sure that whoever buys the 20 percent [the CTIC’s share, as Eli had agreed with Friedman] will pay according to the value of the company that we determined?” he asked. “Yes,” I answered. “I’m sure.” “Who is it?” he asked. “Avraham Friedman,” I answered. “If Avraham Friedman is paying,” he said, “then it must be worth it.”
To Eli’s surprise, the final step – convincing the third owner – was much easier than he had expected. He knew that according to the agreement between them, if two decided on something, the third owner could not refuse. However, they had always sought to maintain cordial relations and make decisions by consensus so Eli was concerned that trying to convince Nachman would delay the agreement. Eli was in for a pleasant surprise: his father-in-law supported the proposal.
In hindsight, it would have been surprising if Nachman or his partners had objected to the merger. After all, it doubled their company’s value practically overnight and although they owned only half of the ne
w corporate entity, they enjoyed full control of its management. From their perspective, nothing could have been better.
•••
The deal proved to be simpler to implement than it had been to broker. Friedman and the other heads of the CTIC lived up to their commitment to Eli, purchasing 20 percent of the joint company, which was called Assia-Zori, for the previously agreed upon sum, which was paid in cash. To avoid taxation, the Assia and Zori shareholders bought their shares from one another and the owners of Zori issued 20 percent of their stock to the CTIC. In this way, Zori was purchased by Assia, a share of whose ownership had already been transferred to the CTIC, whose cash payment was funneled to Zori via Assia. Friedman and his colleagues agreed to the conditions of the three Assia families: full control of the joint plant, even if the CTIC were to join forces with other stockholders, and the retaining of more than half the stocks of the joint company.
The Zori plant was put up for sale, without its production lines. As Eli expected, the property’s attractive location brought in one million Israeli pounds, which, as agreed, went mainly towards severance pay for Zori’s former employees. Most of the production lines were transferred to the Assia plant in Petah Tikva; the rest were moved to Jerusalem.
The March 1963 merger left all parties satisfied. The employees of Zori received increased severance pay and the employees of Assia increased their workload to produce what the workers of Zori had been producing in exchange for additional pay. Eli promised them that Assia would hire a few dozen additional employees in the near future and that the current situation would only be temporary. Assia’s employees also understood that the merger with Zori, a company with an excellent reputation, would improve Assia’s reputation as a pharmaceutical company, thereby enhancing their sense of professional pride.
Eli Hurvitz and the creation of Teva Pharmaceuticals: An Israeli Biography Page 12