|The Shwed nobody knows|
Gil Shwed on responsible share sales, his personal mentors, and what makes Check Point one of Israel's most successful tech companies.
Gitit Pincas 27 Dec 04 14:41
“Never” is undoubtedly the best answer to the question of what is the best time for a manager to sell shares in the company he heads. Whenever a company CEO, president, active chairman, or, in some cases, even a director, tries to sell his or her shares, a reasonable investor asks, “What does he know? Is there bad news in the pipeline?” The problem recently reached the headlines in Israel when Pharmos (Nasdaq: PARS) chairman and CEO Haim Aviv sold shares a few weeks before the failure of the phase III trial for dexanabinol, his company’s flagship drug, was announced. It was all legal and proper, but it creates a feeling of unease.
On the other hand, there are managers who regularly and for many years have relied solely on their salaries, leaving their holdings in their companies on paper, reflecting a purely theoretical profit or loss. When the subject of managers selling shares comes up, one name is always mentioned as the antithesis of almost every other manager Gil Shwed, chairman and CEO of Internet security giant Check Point (Nasdaq: CHKP). Shwed currently owns 11.4% of Check Point, worth $730 million at the current market price, following a recent surge in the share. One sixth of this total, amounting to $120 million, is in the form of options that can be exercised right now.
Shwed is not a regular participant in Israel’s national sport of selling shares. Since the company went public in 1996, his share sales amount to just $16 million: some were sold on the market, and the rest were sold as part of share issues by the company.
Shwed’s policy, however, is about to undergo a gradual change. “Selling shares will be a responsible act for me,” he says. “I want to spread my investments around, and I plan to do it soon. Furthermore, I’ll be forced to sell shares soon, because some of my options are expiring. I’ll have to sell shares, even if I don’t want to.”
”Globes”: What is the logic in selling shares now, when you didn’t sell them in the past?
Shhwed: ”I’ve been at Check Point for many years. I very much believe in the company, and it’s important to emphasize that. I have three considerations in deciding whether to sell shares. One is a need for money, but I admit that I don’t need money. The second is I’ve got to do it. Clearly, when my options are expiring, I’ve got no choice, and that time is coming soon. The third is that I want to spread my investments around. These three considerations are constant; the only question is to what degree they apply.”
Shwed is certainly aware that his sale of shares is likely to have an effect, even if only psychological, on many investors. Even after selling shares, Shwed will still be putting his money where his mouth is.
Do you plan to initiate a plan for the sale of options, in which you will not control the date of the sales?
”I will soon consider all ideas for next year. Beyond that, I don’t like talking about it, because it’s personal, among other things.”
Speaking of spreading your risks, have you also invested in shares of other companies?
”In the capital market, I have nothing to do with anything that isn’t Check Point. I have never bought any other share directly. All the shares I hold, if I hold any, are managed by portfolio managers, according to the specific sums that I allocate for the purpose.”
Some managers scrutinize the documents every day to see how their share is doing, while others aren’t so attentive. Which kind are you?
”I always know in general what the share is doing. Sometimes, I’m very busy, and can’t look at all for an entire day. If I’m just surfing the web at home, I look as frequently as every 30 minutes, or every hour.”
Shwed sweats uncomfortably when he has to talk about himself. He feels much more comfortable talking about his company’s situation, waving goodbye to 2004, and welcoming 2005. This past year has unquestionably been a good one for Check Point, which has grown 22% since the beginning of the year a handsome growth rate. The company remained highly profitable, and maintained its dizzying pace of generating cash. “It’s funny. There have been years when the market was unwilling to accept anything less than 50% growth in revenue. This year, we aimed at 20% growth, and that’s considered a success and a good year,” Shwed comments. Check Point hopes for $508-517 million in sales in 2004, 18-20% more than in 2003. The company’s market cap on Nasdaq is over $6 billion.
When you look at Check Point’s situation today, and since the crisis began, you realize that it has been without question the most successful Israeli company at weathering the storm.
“What happened to us in the crisis? The same thing that happened to the entire market, but as a company, nothing at all happened to us. We didn’t restructure, like many other companies did. In all modesty, I can say that not a single other company - at least none that I know of made it through the crisis like that. Perhaps you’ll correct me, if I’m wrong.”
Check Point passed through the crisis without writing down investments, lay-offs, or losses, and with a great deal of money in the bank - $1.5 billion, derived from accumulated profits and a public issue that raised $39 million. The company’s current pace of generating cash from activity stands at $65 million per quarter. All financial report parameters are impressive, especially in comparison with other companies.”
Shwed is not embarrassed to name names: “Oracle, Cisco, Microsoft, and in Israel, Comverse, Amdocs, Mercury Interactive they all had big one-time expenses, fired employees, and most had losses at one time or another. We haven’t had even a single quarter without a large profit. I’d say that puts us in the top one thousandth of companies in the world in this respect. Our mishap in the first quarter of 2002 was really sad. It followed a tough year, and the World Trade Center terrorist attacks, but our sales didn’t decline much from the peak. I’m not saying that nothing happened, but I am saying that nothing critical happened.”
Shwed says that 2004, at least according to the company’s forecasts to the end of the year, is definitely a good year. “In 2003, we outlined a strategy for increasing the products we offer beyond our flagship firewall and virtual private network (VPN) products. We decided to enter three new areas: perimeter protection, internal protection, and protection for web users. We launched a number of product lines this year, including Zone Alarm (from the Zone Labs acquisition), InterSpect, Connectra, and Integrity. This is the first year in which these products are being sold, and I regard this as one of the our greatest achievements.”
What do you expect for these new products in the future?
”It took ten years for VPN and firewall to become what they are now. We hope that in the short term, we’ll be able to make these products successful, and within two or three years, I hope to have sales of $10 million a quarter for each of them. That’s the measuring stick I think of when considering whether or not they have succeeded.”
It is almost impossible for a manager to answer a general question like, “What is the secret of your company’s success?”, without resorting to cliches. Shwed truly and honestly believes that what helps Check Point to be one of the most successful technology companies in Israel is its corporate culture.
”Different companies have different corporate cultures. I think that ours is very well established, and perhaps different from others. What drives us is the desire to improve and excel, as well as the desire to build things by ourselves. Other companies are motivated by the desire to compete, for example, while this attitude is unsuitable for us. We feel uncomfortable is saying, ‘Another company is doing things this way, so we won’t do things this way,’” Shwed says. According to him, Check Point’s culture is a product of evolution. “Even now, as we are about to enter 2005, we’re constantly thinking about what changes we’ll make next year.”
From which Israeli companies do you try to learn?
”We’re always trying to learn, not to imitate. It’s not a technology company, but first and foremost, I try to learn from Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), which has very smart people. Teva specialized in acquisitions. Before we acquired Zone Labs, we wanted to learn from the experts, so we consulted Teva chairman Eli Hurvitz about the future acquisition. I frequently exchange views with NICE Systems CEO Haim Shani, Comverse CEO Zeev Bregman, Amdocs president and CEO Dov Baharav, and Avi Naor, Baharav’s predecessor. There are no fixed times for these talks; we hold them when it’s convenient.
”I see many talented managers, such as Bill Gates at Microsoft and Michael Dell, who are doing impressive things. I’ll even take it to an extreme and say Larry Ellison at Oracle, whom many condemn, and whom I don’t know personally, has some characteristics I would like to have.”
You’re surely not referring to Oracle’s offer to take over PeopleSoft?
”No, that’s not my character. He also has a lot of characteristics that I wouldn’t want.”
You haven’t made many acquisitions over the years: only MetaInfo in 1998 and Zone Labs. There may be a consolidation trend in the industry, as evidenced by the expected merger between Veritas Software and Symantec. Will you take part in it?
”I see no significant trend towards acquisitions in our industry, even if there were a few here or there. If a major acquisition is the right thing for us to do, we won’t hesitate to do it. With all due respect to Veritas and Symantec and their deal, I see no necessity for this move, other than the desire for size, which is a well-known American trait. Veritas chairman, president, and CEO Gary Bloom has already said before that he wants to bring his company to a $10 billion value, and that’s an aspiration I find it hard to sympathize with. It’s clear to me that other interests lie behind this measure, such as Symantec’s ambition to enter the large enterprise field, and the risk that Microsoft will compete with them in their consumer business. I don’t see the logic for Veritas, though.
”You have to know how to make smart acquisitions. Over the years, we, too, have had investors and members of our board of directors who challenged us on this point. We held endless discussions with them. They would come and tell us, ‘Look, the competition did thus and such; why shouldn’t Check Point do the same?’ I’m not afraid of challenges, and I explained our strategy to them, too, even if they didn’t completely understand us.”
Of the entire impressive list of Israeli companies that you mentioned before, which will be here in another few decades?
”In its current format, the global economy has existed for less than a hundred years, so it’s hard to speak about the future. In the shorter term, in order to succeed, the level of development of technology around the world should be examined, and the set of values motivating the company. I like to quote from the book, "Built to Last: Successful Habits of Visionary Companies," by Prof. Jerry Porras and Jim Collins. They examined the survival rate of companies. It turned out that the ones that survived were those with a strong set of values that suited the environment DNA, if you like. It was also discovered that of the those were successful, it was rare to find companies that had appointed a CEO from outside.”
That brings us to the question of whether you have ever considered bringing in someone from outside. After all, you’ve been CEO of the company since it was founded.
”I’m always pondering this question, and whether I should leave the stage. So far, though, as you can see, there has never been a time when I though it was the right thing to do. I regard us as a team, and I find no difficulty in distributing titles. Jerry Ungerman was appointed company president because he deserved it, and today, he is one of the leaders of the company.”
How have you changed over the years during which you have managed Check Point?
”I’ve grown and developed a lot. I don’t think that my personality has changed materially, except that I’ve learned to balance myself. I’ve also learned how to work with people, and how to handle the challenge of not doing things by myself. Nevertheless, I manage an organization with 1,400 employees. While I used to correct software code by myself and make presentations, today I’m not afraid to delegate the authority to other people.”
If someone had told you in 1993, 1994, or even five years ago, that you would manage a company of this size, would you have believed them?
”Let’s say that it would have surprised me. It’s beyond anything I could have imagined.”
Published by Globes [online], Israel business news - www.globes.co.il - on December 27, 2004