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Taro Pharma and Check Point Software is Common Concern


Taro Pharmaceutical Industries (Nasdaq: TARO), which was unrelated to any change in ownership. So I was surprised to learn next day that global mutual fund manager Franklin Resources Inc. (NYSE:BEN) (Franklin Temple-ton) was increasing its stake in Taro to 16.8%.

By doing so, it sent a blunt message to Taro’s management and owners that it was not the kind of investor that would sit around idly in view of the company’s dire situation, which has also been seen in its stock price. Before I go any further on this, I would just like add that another person who should be worrying about Franklin Temple ton is Check Point (Nasdaq: CHKP) CEO Gil Swed.

Franklin Temple ton is Check Point’s largest investor and in recent months it significantly increased its investment by six million shares to 33.7 million in all, a 14.2% stake, even larger than that held by Swed himself. Notwithstanding the vast difference between the management of Taro and Check Point, both companies have recently hit an annual low that Franklin Temple-ton managers will find worrying.

The difference between its investment in Taro and in Check Point is due, among other things, to the fact that most of the investment in Taro came from Franklin Temple ton’s regional arm in Singapore, while the investment in Check Point was transacted from the US and Bermuda.

This is worthy of note, since the company’s investment manager in Singapore, is economist Dr. Mark Mobiles – a guru with a record of more than 30 years of investment in emerging markets, especially in South East Asia.

Mobiles has a reputation as a bargain hunter who is not intimidated, not even by battle zones. It was he who began investing in Myanmar, long before anyone knew that this was another name for the country of Burma, which is controlled by a military regime.

It is said that a trader on the stock exchange in Thailand once held a gun to Mobil’s head and threatened to pull the trigger if the market went down. “Fantastic, that’s the market I want to invest in,” he replied. “Has Mobiles been in Israel recently?” I asked someone who might have an inkling as to the guru’s latest movements.

“Yes, he was here several months ago,” came back the surprising reply. It was then that I realized why Franklin Temple-ton had increased its stake in Taro. Mobiles has been described by professionals as an investor who looks for value in places where other people think it doesn’t exist.

He conducts his search by making a thorough investigation on the ground, in a process described as “bottom up.” In other words, he wades through the oil and grease on the production floor, before he talks to managers in air conditioned conference rooms and sees smart presentations.

If Mobiles was at Taro’s manufacturing plant in the Haifa Bay area several months ago, he will have discovered a state-of-the art plant working at full capacity, after being approved earlier this year by US Food and Drug Administration [FDA] officials.

He will also have discovered the considerable real estate value in Taro’s properties in the Krakatoa as well as the sophisticated R&D laboratories that have, among other things, produced an ethical drug with a potential annual market of $1 billion. This drug is currently undergoing Phase III clinical trials in Canada.

A person like Mobiles who invests in small emerging markets in South East Asia will be not be daunted by the prospect that Taro could be relisted from Nasdaq. Any such delinting cannot erase the value contained in the company itself, as the new investors in Mercury Interactive Corp. (MERQ) discovered when they acquired it two weeks ago.

Franklin Temple-ton’s legal team will no doubt have studied the complex control structure at Taro, which according to the company’s statement in the annual report for 2004 has three directors who hold 45.6% of the voting rights.

The same report also stated that the company’s ownership structure, and its legal definition in the US, create a negative incentive for institutional investors based in the US wishing to acquire stake of more 15% in the company.

Since they won’t get more than 10% of the control. Taro apparently did not think there were investors such as Franklin Temple-ton, with funds generated outside of the US. Incidentally the other fund that has invested in Taro (11.2%) is not American either, but Canadian.

To sum up, the next few months will see some interesting developments at Taro, with the possible result being a cooperation between the owners and external investors with a view to lifting the stock to much higher values than those at present. They will work together even if that means selling the company in its entirety to one of the many private leveraged buyout funds that operate today.

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