According to the Wall Street Journal, Iscar was valued at about $740 million back in 1997. In the Berkshire deal, the company was valued at $5 billion, more than six times that 1997 worth. A BusinessWeek article on the deal quoted “Israeli financial sources” who estimate the company’s net income last year was $440 million on revenues of $1.4 billion. The company refused to comment on the figures. Iscar’s financial figures will remain a secret; its numbers will become part of Berkshire’s consolidated financial statements.
Buffett says his company was impressed by IMC’s “simple and profitable” business model. “With this acquisition, we have the benefit of investing in a stable business with very significant growth prospects.” Buffett said.
One industry watcher says Iscar has been successful in its strategy to grow and keep market share; the company has designed replacement parts for its tools that can not be purchased from any other company.
No Exit Strategy’
Berkshire Hathaway generally has a hands-off approach to its investments, and will do the same with its purchase of Iscar. The management team will remain in place.
In his 2005 annual letter to investors, Buffett commented on this strategy: “(Our managers) are passionate about their businesses. Usually they were running those long before we came along; our only function since has been to stay out of the way.”
What’s more, Buffett buys companies to keep them not to turn them around for a profit after five years. “Unlike many business buyers, Berkshire has no exit strategy.’ We buy to keep,” he says in his annual report.
Berkshire Hathaway has focused its investments on more traditional industries. Buffett has amassed a diverse portfolio of companies including carpet manufacturer Shaw Industries; industrial coatings company Benjamin Moore; building products manufacturer Johns Manville; and a slew of insurance and utility holdings, including Geico and General Re. It also owns the Buffalo News, See’s Candies, International Dairy Queen, The Pampered Chef, and Fruit of the Loom, among others.
In the distribution world, Berkshire Hathaway bought grocery and foodservice distributor McLane Company Inc. from Wal-Mart in mid-2003. McLane recently purchased McCarty-Hull, another foodservice distributor.
The Iscar transaction remains subject to customary closing conditions, including regulatory conditions. The purchase price of $4 billion makes Iscar the third-largest deal Buffett has completed.
Berkshire to Buy McLane Co.
Berkshire Hathaway Inc., Omaha, NE, has agreed to pay about $4 billion to acquire 80 percent of Iscar Ltd., a global metal cutting-tools manufacturer based in Tefen, Israel. The Wertheimer family, IMC’s current shareholders, will own the remaining 20 percent.
The Iscar Metalworking Companies is a privately held group in the metal cutting tools business through its Iscar, TaeguTec, Ingersoll and other IMC group companies. IMC’s current management team will continue to run the company; the company will remain headquartered in Tefen, Israel, but is now American-owned.
Iscar provides a comprehensive range of tools for metalworking applications, including precision carbide metalworking tools, carbide inserts, carbide end mills and cutting tools covering most metal cutting applications. IMC’s products are manufactured globally; its largest manufacturing facility is in Tefen, Israel. It also has facilities in the U.S., Korea, Brazil, China, Germany, India, Italy and Japan. Iscar’s products are sold in 61 countries.
Eitan Wertheimer, Iscar’s chairman and son of founder Stef Wertheimer, said the company had searching for a strategic partner to secure the company’s future, the Israeli daily news site Haaretz reported. Investors had also approached Iscar wanting to take the company public. “We reached the point of a crucial strategic decision. After making the firm into a multinational one, we wanted to reach the next stage of the game, to be on truly global turf,” Wertheimer said.
He said the Berkshire name will open doors for the company.
“As a truly international business, IMC is a top performer in its industry, with exposure to European, Asian and Latin American markets, as well as significant opportunities for growth as it continues to penetrate the North American market,” said Berkshire Hathaway CEO and Chairman Warren Buffett.
The move will likely have little day-to-day effect on distributors but it does bolster the company’s presence in the U.S., shielding it from acquisition by other big players in the U.S. cutting tools market, including its biggest competitor Sandvik.
Some have speculated Berkshire’s financial strength may help Iscar make more acquisitions in the U.S. Iscar’s biggest U.S. acquisition was made in late 2000, when it announced it would buy Ingersoll Machine Tools Inc., Rockford, IL, at the time a nearly half-billion dollar company.
Wayne Riekkoff, president of KM Tool Supply, Menomonee Falls, WI, says the move may also boost Iscar’s investments in innovation in cutting-tool manufacture. KM Tool has distributed Iscar products for three years and Ingersoll for ten years.
IMC President and CEO Jacob Harpaz said he hoped the transaction would strengthen his company’s position in the North American market and allow it to “continue the phenomenal growth that we have experienced over the past 50 years.”
Riekkoff says he sees Iscar taking aim at Sandvik’s No. 1 spot in the U.S. market. Sweden-based diversified manufacturer Sandvik recently reported $2.8 billion in annual sales. A third of that is said to be from its cutting-tools business. Europe accounts for nearly half of Sandvik’s sales and three-quarters of its production. Sandvik plans to grow in North America and Asia.
Kennametal is the other big player in this market with $2.3 billion in overall sales in 2005, roughly half of which is attributed to its metalworking segment. A little more than half of Kennametal’s overall sales were made in the U.S.