Formula chairman Danny Goldstein: I'll pull Magic out of its slump

Magic loses its sparkle, issues second profit warning
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Danny Goldstein is the chairman of both

Formula Systems

(Nasdaq:FORTY) and its subsidiary

Magic Software Enterprises

(Nasdaq:MGIC). Yesterday Magic announced two things: that it wouldn't meet fourth-quarter 2000 forecasts, and that Goldstein will be taking over the responsibilities of CEO Jack Dunietz and president Israel Teiblum, who are leaving by the end of this year.

For all the worrisome news, Goldstein retains confidence that he can pull the company out of its slump.

In March, when Wall Street was still in the throes of hi-tech ecstasy, Israeli company

Magic Software Enterprises

(Nasdaq:MGIC) conducted a secondary offering. At that time, the company's stock price was at a $25 peak (split, coordinated), reflecting an $800 million market cap for Magic.

Since then, Magic appears to have lost some of its sparkle. It will apparently be ending the year at a record low share price of $2.50 (as of December 26), reflecting a $65 million market cap for the company. As if this decline was not enough, Magic is concluding its year of discontent with a profit warning, its second for the year, in which it advises shareholders of $6 million in company losses and revenues 20% lower than forecast.

At this point, even Danny Goldstein is sounding a lot less optimistic. Goldstein, a gifted financial engineer who has a way with the media, has shown his talent in the past for capitalizing on market opportunities to the benefit of investors, especially those in the Formula group.

Yet even he is hesitant to serve up a rosy forecast of Magic's future.

I don't have much to say today to investors who acquired Magic stock at the offering for $25, except that we are attempting to rehabilitate the company and I hope that this will cause the stock to pick up," Goldstein told TheMarker.com.

This is not the first time that Goldstein has been called in to rescue Magic. The first time was in 1998, when Formula first invested in Magic and its parent company

Mashov

. At that time, Magic was embroiled in crisis, having failed to market its application generator. Its stock was trading at $2 per share.

Goldstein transformed Magic into a profit-making venture, raised the stock price to peak levels, and knew enough to liquidate when Formula sold $20 million worth of Magic stock at an offering earlier this year. That sell-off represented some 30% of Magic's current market cap and is enough to buy almost all of the public holdings in the company.

One quarter later, Magic dropped its first bomb a profit warning for the second quarter. At that time Goldstein offered investors all of the best explanations, pointing to a weakness in the Japanese market, a delay in several orders and the like. All the while Goldstein continued to insist that Magic is an excellent company.

Six month selling process

Today's profit warning reveals a starkly different picture. Magic's crisis is not only the result of a disappointing second quarter, but also stems from an inability to gain additional market share, and a failure to make the transition from a development tools provider to an e-commerce applications provider and customer relationship manager.

Goldstein explains: The long-term slump in the markets complicated and increased the length of our sales process. Today, companies take far longer to decide on acquiring a new e-commerce or CRM platform, and our sales period has grown from 3-4 months to half a year, he explains.

This situation, he adds, is especially true in application and software toll sales," (the latter has been in continuous decline since early this year L.M.) Our new product line should be ready by February 2001, and many customers prefer to withhold their orders until they see the new product line.

Still, it appears that Goldstein is not as worried about the constant erosion in software sales as he is about the company's inability to present a significant increase in its application sales. This was supposed to have been Magic's new growth engine. We may have indeed been rash to have acquired several Magic-based software houses (to develop applications) without first preparing the proper marketing channels, Goldstein admits.

Magic's third quarter report indicates that the company met its forecasts at that time due to lower than predicted marketing, sales, research and development expenses. This is not going to happen in the fourth quarter, says Goldstein. We have significantly increased marketing, research and development expenses. Whatever the short-term cost, we are building a mid to long-range company.

There seems none more qualified to rebuild Magic than Goldstein himself, who today announced he would assume control of the company from its departing CEO Jack Dunietz. I will run Magic for a limited time only, during its interim rebuilding period. Jack Dunietz is an excellent CEO, but is simply not the right man to manage the company in its current transitional phase. Dunietz has immense entrepreneurial spirit, but Magic's emphasis today is on reviving a big, complex organization," Goldstein says.

No tender offer for Magic

Magic's recent plunge may make onlookers wonder if an old market hound like Goldstein won't try to take advantage of the opportunity to buy back the company's publicly-held stock, just as he did with software house ForSoft one month ago. For all intents and purposes such a move seems worthwhile: Magic is a company with $90m turnover, $55 million in cash, and is trading at just $65 million market cap.

But Goldstein is firm: We do not intend to come out with any tender offers for Magic's stock. We believe in the potential to rebuild Magic as a public company, so no ForSoft-like move is planned here.