About a month ago, the management of the Israeli high-tech
company Chromatis Networks announced the closure of the firm
by its owner, the American communications equipment giant
Lucent, telling the staff that all 130 employees, including
the founders, would be laid off. The announcement was notable
for the fact that just over a year ago, in June 2000, Lucent
paid a record price of $4.7 billion to buy the firm.
In 1997, Rafi Gidron and Orni Petruschka set up Chromatis to
develop equipment to maximize the efficiency of traffic on
fiber-optic based urban communications networks. Chromatis
raised money at the seed stage from Jerusalem Venture
Partners (JVP) and a subsidiary of the American
communications equipment giant Lucent, called Lucent Venture
Partners. Fiber- optic communications networks were one of
the hottest areas at the height of the technology stock
bubble that burst over a year ago.
Though the company had not sold much equipment, its
technology seemed so promising that Lucent agreed to the huge
price, paid out in Lucent stock. It was an area in which
Lucent was said to be lagging and the Chromatis technology
held out the promise of giving it a big boost.
The sale brought apparent -- but short-lived -- riches to
everyone involved. JVP's 15 percent share of Chromatis was
worth over $700 million at the time of its sale to Lucent
last year. At the time of the sale Chromatis had 150
employees, each of whom received, on average, Lucent shares
worth $500,000. Some of the employees did exercise their
options, but now that it is closing, according to sources
close to the company, all unexercised options will be
canceled. Many of the options are not worth anything given
the current price of the stock, and all are worth
considerably less.
Only a few months after the sale, Lucent announced that it
had troubles. It made massive layoffs in an attempt to
restore profitability, and there were even rumors that it
would collapse. The price of its stock dropped dramatically.
The shares plummeted 90 percent since the acquisition of
Chromatis. Lucent's revenues dropped drastically and the
company moved into the red. It has laid off 36,000 employees
and closed unprofitable product lines. Three months ago,
Lucent closed another Israeli company, Wave Access, which it
purchased three years ago for $56 million.
In his first interview since the sale of the company to
Lucent, Petruschka said that the latter preferred to focus on
a core of 30 veteran customers, while the Chromatis products
were more suitable for younger companies. A spokesman for
Lucent said that the company had another three products
similar to the ones produced by Chromatis and that customers
were currently demanding these products and not the ones
manufactured by Chromatis.
A tax dispute delayed the distribution of profits from the
sale of Chromatis costing the owners many millions of
dollars.
When the deal was originally concluded last June, shares of
Lucent Technologies were given to the owners based on the
value of more than $50. Because they could not get the tax
status ironed out the Israeli venture capital fund JVP, which
owned 15.5 percent of Chromatis, put off taking the profits
from the sale which would have then amounted to $728
million.
When JVP finally cashed in their shares, they had plummeted
due to the general fall in the stock market and the specific
problems of Lucent, leaving their stake worth "only" $168
million, meaning they had tripled their original stake rather
than multiplied it over 14 times. Since then the stock has
fallen further.
Another fund with a smaller stake cashed in their shares last
August and pocketed a relatively larger profit.
According to Israeli venture capitalists, American and
European venture capitalists have been reluctant to invest in
Israel in light of the hundreds of millions of dollars in tax-
related losses incurred. Israeli politicians are trying to
simplify the tax system. A new regulation issued by the
Finance Ministry says that an investor will not have to pay
Israel more than what he owes or would owe the country in
which he lives.
