After silently settling what many here have characterized as the most potentially damaging lawsuit in Israeli aerospace history, Israel Aerospace Industries (IAI) has taken full control of ImageSat International (ISI), a company it created to stimulate satellite business, but ended up as a renegade, aspiring rival.
The merger of ISI into the corporate portfolio of state-owned IAI aims to revitalize Israel’s remote sensing sector and fuel export sales after a decade of edge-eroding industrial infighting.
IAI, a majority shareholder in the locally based, Dutch Antilles-incorporated firm that owns and operates IAI-built Eros satellites, never announced the out-of-court settlement of billions of dollars claimed by ISI minority partners.
Nor did it go public when it bought out ISI, the company that was created as a commercial vehicle for spinoff service sales in support of Israel’s IAI-built Ofek line of strategic spy satellites.
Both events were concluded more than a year ago; but terms, costs and conditions remain under wraps. ISI will now sell imagery, access and services for IAI-built satellites as a subsidiary of IAI’s Missile and Space Division.
The only hint of the material change in ISI’s corporate structure can be found on its website, where the traditional sentence describing the firm as being owned by “IAI, Elbit Systems, and US and European investors” no longer appears.
The milestone settlement and subsequent buyout were only recently confirmed by both firms and parties involved in years of legal proceedings in US and Israeli courts.
In dozens of interviews, executives conceded that competing interests got way out of hand as IAI sought to sell turnkey programs to the same foreign governments that ISI was targeting for timeshare-like access to its own IAI-built Eros.
ISI, the commercial cutout created to stimulate IAI’s business, was perceived as effectively undercutting its majority shareholder with its attractive lease-like alternative to the limited number of countries with the budget and license approval to buy IAI satellites.
Several sources said the crux of the conflict stemmed from export licensing constraints limiting IAI’s ability to sell military-grade satellites to countries where ISI was able to offer total control of commercialized satellites as they orbited over a predetermined area, with no questions asked and no government interference. ISI does not sell satellites, merely services, one of which allows use of the satellite camera as it orbits over a partner nation’s area of interest.
“Adding insult to IAI’s perceived injury,” recounted a key figure in the dispute, was ISI’s ability to “book nearly $300 million in service business on a $40 million [satellite bought from] IAI.
“IAI had the plan to get governments hooked on their satellites through services offered by ISI,” he said. “But when customers could essentially control that same satellite over their area of interest for just $10 million to $15 million a year, why buy a $120 million system?”
The ensuing backroom intrigue by ISI and IAI executives and turf-battling officers on the ISI board sparked a decade of bad blood that some sources cited as the reason behind failure to publicize events of the past year.
But without exception, all those interviewed expected the claim-free merger to revitalize Israel’s imaging satellite sector after a decade of opportunities squandered by internecine strife.
“No doubt, there were opportunities missed in the last several years. But that’s all behind us. Period,” said Jacob Weiss, a former IAI general counsel who led ISI-related litigation and the eventual settlement of claims.
In August, he was appointed as the post-merger chairman of the ISI board.
“Today ImageSat is basically a fully coordinated arm of the IAI portfolio. The two entities are operating in a coherent harmonious way, with business objectives 100 percent in sync,” Weiss said.
IAI Chief Executive Joseph Weiss — no relation to the former IAI attorney now chairing the ISI board — characterized the acquisition as a long-overdue tailwind for fortifying Israel’s competitive edge in an important sector of the global market.
Prior to the buyout, IAI owned some 70 percent equity in ISI. It held approximately 45 percent from its initial investment in the 17-year-old firm. The rest it acquired from Elbit Systems, another original partner and former majority shareholder of ISI.
Under a December 2008 agreement between Israel’s two largest aerospace firms, IAI agreed to indemnify Elbit for any losses arising from three separate lawsuits. In 2012, Elbit divested itself of all ISI holdings.
“Today ISI is under our full control after working very hard to implement the post-merger assimilation and integration as smoothly as possible,” Joseph Weiss said.
He said the two firms are honing a strategy based on “this big IAI and this little ISI” working in tandem to grow global sales.
“These days, there’s no competition whatsoever,” said the IAI chief executive.
“We want ISI to push us ahead in the product domain, not in the satellite domain. The more they can sell product, the more this will bring us new satellite business.”
Steve Wilson spearheaded multiple lawsuits on behalf of minority shareholders after working for years with senior Israeli executives and government officials to create ISI. He served as the company’s founding chief executive and secured the initial $90 million in American equity that jump-started operations in mid-2000 after the company was started in 1997.
He also devised ISI’s business plan — unique at the time — offering special operating partners freedom to uplink and downlink images captured by the ISI-owned, IAI-built satellites orbiting over a predetermined, 1,500-kilometer-plus footprint. Partners included India, Japan, Russia, South Korea and the UAE.
Wilson on Oct. 21 said confidentiality and nondisclosure agreements prevented him from discussing ISI business or the out-of-court settlement. Nevertheless, he said Israel is still “uniquely capable of becoming a real player” in the dual-use, high-resolution, remote sensing market.
“All I’ll say is that it’s a real shame Israel hasn’t done better in leveraging its unique advantages. I sincerely hope that the settlement will enable Israel to reposition itself in what has now become a well-established and viable commercial market,” Wilson said.
Great Expectations, Dashed Hopes, Lessons
ISI was established in 1997 by IAI, Elbit and a group of American and European investors brought in by Wilson, with enthusiastic regulatory support from the Israeli Defense Ministry.
It was the commercial joint venture all hoped would leverage the government’s 30-year investment in military space.
By selling imagery, access and services from IAI’s military-grade satellites and their Elbit-built payload, ISI was viewed as a commercial springboard for new satellite orders that would increase volume in an industry struggling to survive.
Instead, it became synonymous with untapped potential, battling turf and an industry distracted by years in court.
A copy of its business plan from March 1999 — a plan that was used to raise considerable private-sector investment — aspired to a constellation of eight Eros-class satellites through 2005.
Only two are in orbit.
And one, the Eros A launched in December 2000, is no longer generating revenue and has essentially run out of life.
Moshe Keret, a former IAI chief executive involved from the beginning in ISI, said the entity created to boost business became an annoying and often bitter competitive threat. ISI was tripping over IAI’s toes all over the global market, he said.
“The whole ISI story started out promising, but didn’t end well,” Keret said. “At a certain point, it became a case of the tail wagging the dog.”
Keret was one of the many current and former top executives — a veritable who’s who of Israel’s aerospace sector — targeted for some $6 billion in damages for a 22-count slew of alleged offenses ranging from fraud, conflict of interest and contractual breach.
Weiss, the former IAI general counsel now chairing the ISI board, insists the initial July 2007 lawsuit filed in the US Southern District Court of New York was “a major nuisance lacking in merit” that never actually posed a debilitating threat to Israel’s aerospace industry.
Contrary to minority shareholder claims that major Israeli partners were purposely draining the firm of business potential, Weiss said ISI has always made money and remains solidly in the black.
Nevertheless, in an Oct. 21 interview, he conceded that the protracted litigation proved “very disruptive for a very long time.”
Plaintiffs claimed ISI rights or royalties on all technologies developed in the context of the Eros program, including a potential $1.6 billion venture between IAI and Northrop Grumman — long dormant — to sell up to eight radar satellites to the US government.
The 197-page lawsuit contained not only sensitive details of ISI’s international dealings dating back seven years, but classified information on MoD’s cooperative ties.
The suit revealed details that ISI, until today, refuses to discuss, including exclusivity agreements with Taiwan, Angola and Venezuela terminated by customer or geopolitical demand.
It detailed ISI’s extensive global presence, with “formal associations” with leading remote-sensing users in Argentina, Australia, Canada, India, Italy, Japan, Russia, Singapore, South Africa, South Korea, Sweden and Taiwan.
It was so explosive that even though the suit had been filed in US court, Israel’s MoD got judicial authorities here to impose a gag order on the entire case.
“There’s a strong market for high-quality, reasonably priced, high-resolution satellite imagery and access. And there’s no question that having been freed of that nuisance, ImageSat, in lockstep with IAI, can grab our fair share of the market with a harmonized portfolio of products and services,” Weiss said.
Retired Maj. Gen. Itzik Ben-Israel now serves as chairman of the Israel Space Agency. But in a previous role as MoD director of defense research and development, he spent “an insufferable amount of time” on the protracted dispute.
“I really hope all the legal problems are behind them. If so, it should help IAI’s business plan to succeed,” he said