The four largest shareholders of Scitex last week announced their rejection of Silicon Valley entrepreneur Davidi Gilo's hostile takeover proposal.

The shareholders' International Paper Company, PEC Israel Economic Corp., Discount Investment, and Clal Electronics Industries, who collectively hold about 36 percent of Scitex shares, said Gilo's proposed acquisition of Scitex at a purported $20 per share, or $856 million cash, "represents the wrong direction for Scitex."

It was the first-ever hostile takeover bid for an Israeli firm.

"We are not interested in pursuing a sale of our Scitex shares, and certainly not on the terms that Mr. Gilo implied," the Israeli shareholders said in a statement.

"We believe that the best interests of all shareholders are served by permitting the company to realize its full potential."

Gilo's hostile takeover offer March 31 amounted to 44 percent above Scitex's market value.

Capital market analysts expressed surprise at the shareholders' decision and predicted that if Scitex continues to register losses, the shareholders are likely to replace Scitex chairman Dov Tadmor on the basis of "incompetence."

The analysts said they expected the shareholders to agree to the offer on condition that the sale price is raised, as is customary in proposals of this kind.

"If they [the major shareholders] do not sell, they will be faced with a problem," a source said.

"Assuming that Scitex performance does not improve in a year's time, and the share drops to $14 or $16 per share, the company's shareholders may decide to get rid of David Weinshal [manager of Clal, one of the major shareholders] and Tadmor.

"Already today, the Scitex board of management is critical of Tadmor's and Weinshal's management of the company," the source added. "Their decision to reject the proposal puts the shareholders' representatives in a bind. Personally, I don't believe Tadmor or Weinshal will be able to contribute anything to the company this year that they couldn't contribute in previous years."

Tadmor could not be reached for comment.

Scitex claims $155 million in cash and liquid assets, which Gilo told The New York Times he would use to turn Scitex around.

"The major thing that hurt their business was they missed the whole desktop publishing phenomenon," Gilo said. "They had the software years ago."

The Scitex board, in a press release, said it has "resolved to continue Scitex's strategy of exploring the options available to Scitex for maximizing shareholder value.

"In fact, the company has already taken a number of decisive actions to increase shareholder value including acquisitions to realign Scitex's basic business strategy, management changes and significant expense reductions."

But a source related to Gilo said the entrepreneur will not back off from his decision to gain control of Scitex.

"Davidi is decisive in his offer," the source said. "He worked on the subject with a team of people during the last few months and has considered all the possibilities."

According to The New York Times, Gilo is a 39-year-old dual U.S.-Israeli citizen. He dropped out of U.C. Berkeley after one term and started a consulting firm that provided customer support and equipment for superconductors at universities, government agencies and other institutions.

Analysts told The New York Time that Gilo started the DSP Group with $1 million in venture capital in 1988. DSP supplies technology for digital telephone systems and tapeless answering machines.

He left DSP early last year to focus on DSP Communications, a spinoff: together the two firms are valued at $700 million.