Corporate Finance : Companies on the Move

ISRAELI ENGINEERING FIRM TAKES ON US MARKET

 

 

 

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Meir Dor, CEO,Baran Group

Meir Dor is making a big bet. Baran Group, the company Dor heads, is Israel’s biggest engi-neering firm and has helped build and design everything from a dry storage base for the Israeli army, though wireless net-works at home and in Europe, to semiconductor and biotechnology plants.

Baran Group participates in virtually any construction project of any size in Israel and has made headway in select European markets. Seeking to rev up the Omer-based company’s rev-enue growth and diversify its business, Baran chairman and chief executive Dor now has his sights set on the biggest market of all, the United States.

Specifically, Baran wants to provide the nuts-and-bolts expertise and services to build up the US wireless communications market, which still badly lags Europe and Israel in service quality and customer penetration.

“We decided to grow out-side of Israel because the market is too small and our share is too big. If we want to keep growing, we have to go outside of Israel,” says Dor.“The United States is a very large market and one whose cellular mar-ket we believe is still way behind.”

Battered by political unrest and the back-wash from the tech boom, the Israeli economy is in a swoon. Baran Group report-ed revenue of $219 million in 2001 and expects that revenue to have dipped slightly below $200 million in 2002.The company has a lofty target to reach $500 million in annual revenue in the next four years, large-ly through aggressive over-seas expansion.

Key Acquisition

To jump-start its US move, Baran Group in November bought financial-ly troubled o2wireless Solutions, an Atlanta-based provider of outsourced infrastructure services to wireless telecom compa-nies.To further show its commitment to the US mar-ket, Baran moved Dor to New York and listed its shares on Nasdaq.

“To become an interna-tional company, we have to be listed here in the United States, and Nasdaq is a good exchange for us because we’re mainly involved in technology projects,” says Dor.“You can’t be an inter-national player and be trad-ed only on Tel-Aviv Stock Exchange.”

O2wireless helped build some 50,000 cellular tow-ers around the United States and became one of the three leading wireless network infrastructure serv-ices companies, along with LCC International and Wireless Facilities.At its height in 2000, o2wireless had 800 employees and $140 million in revenue.

But the company’s rapid growth came at the expense of profits. In fact, it never made any money, and the losses mounted as the global technology downturn deepened. In contrast, Baran has been profitable in every one of its 23 years of existence.

“We found o2 in financial difficulty. On the other hand, they have a very good pro-fessional reputation and an excellent list of clients. So they can be a very good plat-form for us to start penetra-tion in the States,”Dor says.

O2wireless is now down to about 200 employees and $50 million in annual rev-enue. But Dor says the firm, renamed Baran Telecom now that it’s a unit of the Israeli company, will turn its first profit in 2003 on rev-enue of about $70 million.

Banking on Wireless Growth

Dor and Baran Group are banking on an eventual recovery in business spend-ing on wireless services and infrastructure as usage of cellular phones in the United States catches up to other parts of the world.

They might have to wait a while. Spending on wireless infrastructure and related services in the United States is expected to fall another 10% to 20% in 2003, after declining up to 40% in 2002, says Mark DeRussy, wireless analyst at the bro-kerage firm Raymond James & Associates in St. Petersburg, Florida.

DeRussy says that a lot of the investment in the wire-less business in the late 1990s was based on expec-tations that “we would be living in a truly third-genera-tion world of wireless.”That clearly hasn’t happened yet, as the technology was slow to take hold, debt-ridden telecom companies slashed their capital budgets, and investment dried up.A lot of excesses still remain to be wrung from the market.

But there are opportuni-ties for infrastructure providers such as Baran Telecom. Cellular phone services in the United States are still plagued by poor coverage and quality as well as high customer turnover. Penetration rates (40% to 45%) badly trail those of Israel and technologically leading countries in Europe and Southeast Asia.

“I believe the need for communications, comput-er products and services and the Internet will grow, and we shall see it very soon,” says Dor.“We need another year or two before it will start grow-ing, but the world needs these things. It’s just a question of time.”

Baran paid only about $3 million in stock for o2wireless, but all told the company is risking about $20 million, as it took on some of o2’s debt and injected cash into the business.“It’s a risky time, but there are opportuni-ties, and we believe we should take some risk. If we should succeed, then we didn’t spend much. If we should lose, it’s a big loss,” says Dor.

Another risk Baran’s expansion effort potential-ly engenders is a threat to the company’s close-knit culture. Dor says that’s been key to the compa-ny’s expansion as it has grown to 1,500 employ-ees.“The challenge is to continue growing every year, keeping our profits growing at the same time and not losing our cul-ture.We are a family com-pany even though we’re quite large.We have a special spirit, and we would like to keep it,” he says.

Dor started the compa-ny in 1979 as a young engineer. He was joined by six partners, and they called their group “Seven Founders.”The seven are all still involved with the firm.All of Baran’s senior managers are paid rough-ly the same salary, about $70,000 per year.

“Most of our income is coming from success-divi-dends, bonuses and profit sharing. I believe this is one of the key reasons behind our success,” says Dor.

—Adam Rombel

COMPANY SNAPSHOT: BARAN GROUP

■ Founded: 1979


■ Headquarters: Omer, Israel


■ Chairman & CEO: Meir Dor
■ Employees: 1,500


■ Web site: www.barangroup.com


■ Description: Baran Group is Israel’s largest engineering firm, five times bigger than the No. 2 company. It has helped build wire-less networks in Israel and Europe, a dry storage base for the Israeli army, and semiconductor and biotechnology plants.


■ Sales: Baran Group reported $219 million in revenue and $15 million in net income in 2001. Its 2002 revenue is expected to be a little below the $200 million mark.


■ Strategy/Key Developments: Baran is betting on expansion into the United States and its wireless market to diversify its business and increase revenue growth. The company recently bought o2wireless Solutions, an Atlanta-based firm that helps build wireless networks, and listed its shares on Nasdaq.


■ Customers: Clients include Israel’s defense department, Ericsson, Israel Electric, Orange and Teva. Source: Baran Group

 


 

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