Magic Software Enterprises Ltd, the supplier of platform- independent rapid application development tools, is one of Israel’s most visible software start-ups. But in spite of good reviews and a strong customer list that includes the likes of AT&T, Rolls Royce and Ciba Geigy, the company has disappointed financially. In its last full financial year, Magic lost $4.6m on revenues up a paltry 2.8% at $37.4m. And in the first quarter of 1998, the company lost a further $1.2m on sales that dipped 14.4% to $8.2m. Gad Goldstein, president of Formula Systems, Israel’s largest public software development company, says Magic’s business strategy is at fault. The company has concentrated on selling software licenses, ignoring the associated services business, he says. So while the cost of development projects based around Magic’s tools may run into millions of dollars, Magic’s share has been measured in the tens of thousands. That is about to change. In May, Formula bought a 14.2% stake in the RAD vendor, with options on another 16.9%. More importantly, Formula is negotiating for voting control of the shares held by Mashov Software, Magic’s parent company, which currently holds 38% of the company. Formula hopes to gain control over Magic’s destiny and push the company towards services.
Controlling stakes
For Formula, this type of transaction is becoming a common occurrence. Formula’s growth strategy has been to buy young Israeli companies, take over their management, fund product development, then take them public on the Tel Aviv Stock Exchange and/or Nasdaq. Formula now has a controlling stake in seven public and four private companies, the most famous of which is Crystal Systems. In 1993, Formula brought Crystal, a code conversion tool and services vendor, for $5,000. It then invested around $200,000 in development and took the company public on Nasdaq in January 1997. Crystal’s market capitalization currently stands at $180m. Formula has also taken a number of minority stakes in other Israeli IT start-ups. Examples include TriD (three-dimensional storage), Avionitek (aerospace systems), Phonetic Systems (telephony systems), Eventus Logistics (supply chain management) and Elemental Software (internet software). These investments, says Goldstein, may end up forming the basis of a venture capital fund, and Formula is already in the process of raising $80m on Nasdaq for further acquisitions. Although Formula’s interests span a wide technology range, there is a strong emphasis on services. The company’s software services division, which comprises Applicom Software (bespoke application development and systems integration), FCT (mainframe and Unix software distribution in Israel), ForSoft (IT services) and Nikuv (financial and logistics systems), had revenues of $71.5 in 1997, 46.8% of the total revenues, which were up 62.1% at $152m. Victor Halpert, vice president of investment bank BancAmerica Robertson Stephens, predicts that the division will grow to $108m this year and $144m in 1999. The company’s other two divisions are proprietary hardware and software products, and software licensing and marketing. The proprietary hardware and software division had revenues of $50.6m in 1997 and encompasses Y2K and Euro conversion tools and services (Crystal Systems Solutions), television subscriber management (Wiztec Solutions) and aerospace systems and software (Transtech, Tiltan Systems Engineering and Intersystems). The software licensing and marketing division comprises Sintec Advanced Technologies (hardware and software distribution in Israel), and contributed $32.8m in 1997. The majority of Formula’s business is still confined to Israel but, for the past five years, the company has been trying to expand its overseas revenue through partnerships with other companies. For example, Crystal now has a worldwide agreement with consultants Ernst & Young and has worked with the firm on 28 millennium projects to date. According to Goldstein, there is now a $500m backlog of orders based around Crystal’s tools. While Israel still
represented two-thirds of Formula’s revenues in 1997, the company had 22 Fortune 500 companies among its customers, including Ford Motor Company, Bell Atlantic, Deutsche Telekom and Pratt & Whitney. Halpert at Robertson Stephens expects Israel will represent less than half Formula’s revenue total in 1999. Computer Business Review.
