Here's an article from today's Globes.
Galileo Goes Backwards One Year, Willenz Counts Millions
By Adi Mendelson
Up to a few months ago, Galileo shares were considered the hottest Israeli item on Wall Street. The company's share was mentioned in the same breath as the likes of Check Point and ESC, which achieved a market value of $1 billion and beyond. However, the share has lately been losing altitude.
From a record $44.5 per share which it reached last October, the share fell 57%, down to $19 on Tuesday, and is now only $2 above issue price. The company's market value, which at its peak reached $800 million, shrank accordingly to only $368 million.
Erosion of the Galileo share began with the general fall on Wall Street last October, following the East Asian crisis. There was a certain revival later on, but in March this year the share once again slipped into its previous ways, and started on a southward journey which gathered speed in May, bringing it to its current low ebb.
The downturns have taken place without any report by the company on significant new developments that could provide an explanation for them. While massive sales during this period by the company's major shareholders, founder and CEO Avigdor Willenz, and Nitzanim venture capital fund, are pushing the share down, this alone can hardly explain the sharp drop in price.
Neither do the company's financial results shed any light on the reason investors have had a change of heart. The continuous positive trend Galileo has presented in its financial reports since its July '97 issuance, has not stopped. The company, engaged in the development of VLSI processors for the telecommunications industry, and which developed a unique switch chip for Fast Ethernet communication technology, still continues to enjoy a long list of large clients such as Cisco, Bay Networks and Hewlett Packard.
The chip Galileo developed, which is a combined silicon communication switch, is intended for Ethernet networks, and allows system upgrading without the necessity to change the network or re-plan the whole network. This significantly reduces the price of communications, from three-digit dollars to only two-digit dollars.
In the first quarter of '98, Galileo posted a 15% increase in revenue and an 18% increase in net profit, compared to the previous quarter. While market estimates are that the second quarter will be weaker than the company expected, and that growth rates will be lower than previously forecast, the general assessment is that Galileo is going through a transition period, due to the introduction of new products into the market.
It is also difficult to find a persuasive explanation for the fall in the Galileo share from the analysis published a few days ago by Robertson Stevens US investment house.
At the end of April, Robertson Stevens raised its recommendation for the Galileo share from buy to strong buy. The investment bank estimated that Galileo's new products will eventually boost its recently slowed growth rate back to 1997 levels.
What, therefore, has caused the rapid fall of the Galileo share? The analysis by Robertson Stevens economists explained the fall in terms of the situation with other shares in the integrated circuit and semiconductor industry. The fall in these shares stems from the strong echo created by several profit warnings and disappointing results, published by several large companies in the industry, such as National Semiconductor and Hewlett Packard.
Robertson Stevens analysts try to differentiate between branches of the industry - companies whose activities are connected to the area of computers, and companies such as Galileo, whose activities are connected to the area of communications. Accordingly, they note that not all of the deterioration in the industry is necessarily bad for Galileo. The company's business data, like those of other companies in communications, continue to be positive. Robertson Stevens' conclusion is clear - this is an opportunity to buy.
Besides Galileo, Robertson Stevens points to six other companies in the integrated circuits field, whose shares, in the analysts' opinion, unjustifiably posted sharp falls. However, Galileo's plunge is the deepest in this group. The review was published at the end of May, when the Galileo share stood at $22.5 per share. Since then, the share has lost another $3.5.
Parties at interest at Galileo are apparently not too anxious about the continued plunge. They are anyway already ahead. Founder and CEO Avigdor Willenz has so far succeeded in selling $40 million worth of Galileo shares, the latest sale taking place in mid May. Willenz continues to hold 27% of Galileo shares, currently worth $100 million.
The Kardan group, which invested in Galileo through the Nitzanim venture capital fund and Kardan Technologies ( which in the meantime has sold all of its holdings in the company), has so far realized $31 million worth of shares. Nitzanim currently holds 6% of the company's shares, at a total value of $20 million.
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