Phone.com beefs up for big pitch
By mixing a multibillion-dollar merger with the recruitment of the No. 2 Cisco Systems (Nasdaq: CSCO) executive, Phone.com (Nasdaq: PHCM) and Software.com (Nasdaq: SWCM) didn't have any problems getting attention for their marriage Wednesday.
The bigger challenge for the combined firm, as yet unnamed, will be to hold and keep the minds and pocketbooks of its customers: telephone companies. Phone.com sells software and services for wireless telephone Internet access, and Software.com sells carrier-side email and messaging infrastructure. Both target telephone companies.
The deal happened because courting carrier behemoths is perhaps better achieved by a larger, luminary-led entity than by two smaller startups, particularly when well-funded players like Microsoft (Nasdaq: MSFT) and Nokia (NYSE: NOK) have signaled their intentions to compete in the infrastructure-services arena.
TWO THUMBS UP
Investors certainly gave a thumbs-up to the planned $6.4 billion merger, as stock prices for both Phone.com and Software.com rose sharply during trading Wednesday. Software.com, which began the day at $107.75 per share, added almost $35 per share, climbing to a close of $142.44. Phone.com, which acts as the acquiring firm in the deal, saw its shares rise almost 17 percent, from a Tuesday close of $78.06 to Wednesday's final mark of $91.13.
Cisco, whose former executive vice president Don Listwin will be CEO and president of the new firm, also improved Wednesday, from $65.50 to $67.81. The merging companies will each own about half of the combined entity, with each Software.com share being exchanged for 1.6015 Phone.com shares, accounted as a pooling-of-interests deal. The deal, approved by both companies' boards, is expected to close by the end of the current calendar year.
What Phone.com and Software.com bring to their marriage is a combination of wireless Internet smarts, centered around Phone.com's wireless application protocol (WAP) browser technology and Software.com's back-end software for combining email, messaging, and voice services. While both Phone.com and Software.com have won customers on the strength of their respective product offerings, one analyst says the merger has more to do with meeting customer needs than technology.
IN YOUR FACE
"Large carrier customers require plenty of face time," says Ted Jackson, senior analyst with financial services firm U.S. Bancorp Piper Jaffray. "They require lots of hand-holding, and want to deal with a local sales staff, not someone in Silicon Valley."
The merger, Mr. Jackson says, will create a company with 1,400 people, in 25 offices that span the globe. With a combined sales force of almost 500 people, the merger will "clearly accelerate" the companies' ability to hit the carrier market in multiple locales, including Europe, Asia, and other foreign markets.
"It's not about the technology, as much as it is about who's got the customers," Mr. Jackson notes.
Bringing Mr. Listwin on board as CEO and president is just "icing on the cake," according to Mr. Jackson. But it's a tasty frosting, given Mr. Listwin's history of helping build Cisco's presence in the carrier market. It helps that the 41-year-old Mr. Listwin, widely viewed as a potential heir apparent to Cisco CEO John Chambers, is leaving Cisco on amicable terms. That lets potential customers know that Cisco -- which held 7 percent of Software.com -- has "given its blessing" to the deal, Mr. Jackson says.
CALLING FOR GROWTH
The overall field for back-end carrier infrastructure services is widely seen as one about to explode, especially as declining service-access prices force carriers to seek new streams of revenue. With wireless phone use expected to grow exponentially worldwide as Internet access becomes more available, technologies like Phone.com's WAP-based browser products will likely grow in use. It's a phenomenon not lost on players like Nokia and Microsoft, with the latter unveiling new smart-phone and mobile-browsing technologies on Tuesday. Personal digital assistant king Palm (Nasdaq: PALM) will also vie for market share with its Palm OS and related services.
Still, some observers argue that Phone.com's WAP offering is already dated, and may not be as compelling a technology going forward.
"WAP is definitely not the right answer for the enticing consumer experience," says Roel Pieper, a longtime industry veteran who is now a leading European venture capitalist well-versed on the wireless market. What will truly drive carrier profits, Mr. Pieper says, are more innovative offerings that tie consumers directly to IP data, which may be presented graphically or via voice.
On the back-end messaging services side, Software.com has been competing with players like Critical Path, Mail.com, and USA.net, who are all vying for a share of the messaging outsourcing pie. What may help the merged companies -- at least initially -- is the fact that their customer bases have little crossover.
During a Wednesday conference call, Phone.com founder and former CEO Alain Rossman said the companies' customer lists overlap by only 7 percent, presenting "a phenomenal cross-selling opportunity." Piper Jaffray's Mr. Jackson, who covered both companies pre-merger, says the combined entity's revenues could top $500 million in fiscal 2001, a projection that does not include possible revenues from some recently announced products, like Software.com's lightweight directory access protocol (LDAP) directory server.
Mr. Listwin's presence, meanwhile, gives the combined entity -- which may be called Phone.com, Software.com, or some other name -- a bit of star power, along with an energetic boss who knows the market well. Mr. Listwin also knows Software.com well, having served on its board.
"I'm really excited to lead this combination," said Mr. Listwin in the conference call. Though he expressed regret for having to leave Cisco, Mr. Listwin said he was looking forward to joining forces with Phone.com's Mr. Rossman and John McFarlane, the CEO of Software.com, a duo he hailed as "great entrepreneurs and visionaries."
Mr. Listwin, Mr. Rossman, and the other heads will need every ounce of their vision and ability to satisfy Wall Street, which clearly expects the merger to yield Web gold. In the end, that may be their biggest challenge.
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