A study by the Tel Aviv Stock Exchange found that dividends distributed by listed companies dropped 40% in 2000.

TASE-listed companies handed out only NIS 6.5 billion in 2000, compared with NIS 10.5 billion in the previous year.

The study attributed the drop to the decline in corporate profits in 2000 because of the general and hi-tech slowdown - and a drop in leveraged buyouts.

Businessmen who acquired companies using borrowed money like to withdraw dividends in order to pay back the loans. Indeed, a wave of leveraged buyouts swamped the business scene in 1998 and 1999, leading to a surge of dividends taken out precisely in order to pay back the loans.

The question is, will the trend of diminishing dividends be sustained this year? Will it get worse? Or perchance reverse, leading to another wave of dividends?

Dankner Investment, a case in point
For a clue, look at the corporate statement Dankner Investment released yesterday. The company seems to exemplify the situation of many of the companies listed on the TASE.

At the height of the Internet and communications euphoria in late 1999, Shmuel Dankner acquired the 30% controlling interest in Dankner Investment from Yitzhak Dankner and his son Nochi Dankner, in a deal evaluating the company at $300 million.

That extraordinary company value, ten times the company's equity, was due to the extraordinary value the market then related to Dankner Investment's communications holdings.

Dankner Investment held pieces of Partner Communications (Nasdaq, TASE: PTNR, LSE:PCCD), which then commanded a market cap of $3 billion; Matav Cable Systems Media (Nasdaq:MATV), then traded at a value of half a billion dollars; and the long-distance carrier Barak, which wasn't listed for trade at all, but was earmarked for a Wall Street IPO.

A few months after the deal, Dankner Investment announced a $50 million dividend, the biggest in its history. We may assume that Shmuel Dankner used his share to repay some of the loan he took to finance the purchase.

Three questions come to mind
Then, the massive dividend was taken for granted. Today, with Dankner Investment stock down 70%, a reader perusing the company's financial statement might wonder about three things.

Who, the reader might wonder, is the one losing sleep at night? Is Shmuel Dankner, who owns a company with $30 million equity and loans of $500 million, tossing and turning? Or, perhaps, it's the bankers who lent him the money crawling out of bed red-eyed and draggle-tailed, worrying desperately about the company's prospects?

The second question is whether the banks would have allowed Dankner to distribute such a fat dividend last year, if they'd foreseen the contraction of the company's communications investments. Dankner Investment ended the first half of 2001 with an NIS 80 million loss, because all its affiliated companies lost money.

The third question is how on earth Dankner will repay the loans taken at year-end 1999.

Shmuel Dankner is well-to-do and must have considerable personal sources. But as for Dankner Investment itself, it's hard to see it returning the money under the current market conditions.

Once, twice, thrice foiled
Dankner Investment is merely one of many companies in similar predicaments. In the last five years, many of the companies publicly traded in Tel Aviv were taken over through leveraged buyouts. In most cases, the borrower's plan was to repay the loan by taking out dividends, or by taking profit on the company's stock when its price on the market rose.

Fine, until a year ago. First of all, most of the acquired companies were sitting on piles of cash not "put to work", which could easily be distributed as dividends. Secondly, most of the companies generated fixed cash flows, or alternatively, they had assets that could be sold for cash. Third of all, the banks were prepared to extend more and more credit, even when the loans were clearly meant to finance inflated dividends.

Then came the turnabout. Share prices collapsed, eliminating the option of selling stock for a profit.

Look at what happened to businessmen Roy Gil and Eitan Eldar, who borrowed money to buy shares in Israel Land Development Corporation. ILDC stock dived, the controlling Nimrodi family won't save Gil and Eldar by buying their stake at a premium, they're stuck with the shares and the interest is mounting.

Most companies have used up their surplus cash. Their only hope of dividends comes from selling assets, cash flow, or taking out more loans. But in today's sorry economy, it's hard to sell assets at a good price, and companies are seeing their cash influx shrink.

That means that the companies' ability to pay dividends, and the control shareholders' ability to repay loans taken to buy the companies, depends on the banks' willingness to reschedule repayment and put off interest payments.

Watchdog eat dog
The banks have every incentive to help out the borrowers, mainly the big ones. If they collapse, so will the banks. But last week, suddenly the watchdog stepped in.

Supervisor of Banks Yitzhak Tal believes the banks have been sweeping their troubles under the rug. He means to force them to make extra provision for doubtful debt in order to more accurately reflect the risk in their credit portfolios.

Tal's ruling will force the banks to stop expanding credit to companies, and stop handing out dividends to their own shareholders. The ones to bear the brunt will be the companies, their indebted owners, and the banks' owners, too. They also borrowed money to take over the banks.

The Dankner family, for instance, owns part of Bank Hapoalim and has also borrowed heavily from Bank Leumi through companies such as Dankner Investment and Salt Industries.

Which may lead us to conclude that it's nobody's money and the whole bunch is sleeping like innocent babes at night ? the banks, the companies and the people who own them.

The only one who's probably pacing from dusk to dawn is evidently Supervisor of Banks Yitzhak Tal. His decision of last week indicates how worried he is that the situation, and the status of the banks' credit portfolio, is deteriorating. He wants to shift the burden of worry to the banks. The next phase will be for the banks to roll over the worry onto their borrowers.

So, to return to our opening question: Whence dividends? Apparently the need for them is just as fierce, but the ability to obtain them is shrinking by the day.