fwiw, Globes speculates on the ongoing Infosys-NICE saga.
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NICE hand for Kobi Alexander
Hadass Geyfman
02.01.2001 13:32
globes.co.il
NICE System’s profit warning couldn’t have come at a better timing for Comverse.
For several years, rumors have circulated in the market about Comverse’s desire to acquire NICE, while NICE itself would welcome a merger, but wanted to be the one doing the acquiring. Until now, with almost twice the sales volume, NICE could indulge its ego trip. The profit warning that NICE published December 28 meant there is no more time left for games. After the share price plunged 60% to $20, it appears that NICE is falling like ripe fruit straight into the embrace of Comverse and Kobi Alexander.
NICE’s $20 share price is considered very attractive by Comverse. In a conference call held by Comverse with analysts, the company claimed that acquiring NICE is simply a matter of price. The critical question in this affair is the synergy value of the NICE merger, over and above its market value, and how much premium Comverse will have to pay. Nevertheless, market estimates are that even if Comverse pays nearly a 100% premium, i.e. $400-500 million, the acquisition will be worthwhile.
Another point is the unclear consequences of the fact that NICE has been issued on Nasdaq, while Comverse Infosys has not. There were those in the market today who hypothesized that NICE would acquire Comverse Infosys, although most of the shares would be in the hands of Comverse Technology (a reverse merger).
The dominant opinion in the market, however, is that Comverse will acquire NICE, particularly in view of the heavy hints recently dropped by NICE chairman Benny Levin. Either way, most current NICE shareholders are US institutional investors. It can be assumed they will wish to cut their losses and will prefer that NICE be swallowed up by Comverse.
In any event, if Comverse Infosys does acquire NICE, it will reach Nasdaq with much better chances, since by that time, if there are no drastic unexpected changes in the market, Comverse Infosys (with NICE in tow) will have uncontested control of the market.
Ostensibly Comverse does not actually need the approval of the heads of NICE for a merger. In the current situation, Comverse can perform a hostile takeover with virtually no effort. It is by no means sure, however, that Comverse Technology chairman Kobi Alexander will want to take this step, and it is even more doubtful whether he will have to. Levin has vacated the CEO position, and it can be assumed that in the company’s current situation, he will not insist on retaining control in the merged company.
In either case, the capital market is up in arms over the fact that NICE has apparently already known for six months that it is in the midst of a crisis and made no announcement of the fact. “First of all,” says a capital market source, “I find it hard to believe that they became aware of the situation only at the last possible moment. Second of all, management decided to shift to a divisional structure and a direct marketing setup. The agents operating in the indirect marketing setup are consequently eliminating the preference they had previously granted to NICE products. If NICE took this risk, it apparently knew how bad its situation was.”
Nevertheless, the company gave the analysts a feeling of business as usual. “It may be that the resulting negative sentiment caused the share to fall further than justified by the situation,” the capital market source said.
Comverse Infosys has not yet published its fourth quarter results. Since Comverse’s financial year ends in January, it will apparently publish its financial statements only in February. At the same time, it can be seen that in the third quarter, Comverse Infosys’s revenues remained at 12% of Comverse Technology’s revenues.
While some of the revenues attributed to Comverse Infosys actually belong to Loronix, which was acquired this year by Comverse, Comverse Technology has posted 37% annual revenue growth, so it can be assumed that Comverse Infosys’s revenues also grew somewhat, or at least have not decreased.
On the face of it, it would seem that if Comverse acquires NICE, the issuing of Comverse Infosys will be postponed, but the market believes that the company will overcome the obstacle. After all, Kobi Alexander is known as a manager who is not afraid of issues. He issued the Ulticom subsidiary at a time when the market was plunging. The issue was successful and the share subsequently soared.
NICE currently has three divisions: military products, video recording, and voice recording. Comverse Infosys sold its military products division. In the video recording field, it acquired Loronix, which provided it with market share and technology, while NICE is lagging far behind in these fields.
In the digital voice recording field, NICE has a clear advantage over Comverse Infosys. NICE has both market share and complementary technologies that Comverse Infosys lacks. For this reason, it can be assumed that this division is the bride sought after by Comverse Infosys. On the other hand, this division appeals to a market in which growth will not exceed 10-15% per year and may be even less. This division is actually the one responsible for NICE’s fourth quarter profit warning.
One of Comverse Infosys’s disadvantages vis-a-vis NICE is that it lacks a presence in the voice logging field, one of NICE’s strengths. In view of the situation, they may very well decide that consolidation is in order.
In short, Comverse Infosys can now acquire NICE at a 60% discount, compared to the price it would have had to pay before the profit warning. “In my opinion, the merger is very logical,” says the capital market source. “At the end of the third quarter, NICE had $70 million in cash and financial assets, after deducting loans. Its fourth quarter losses will reduce this, but Comverse will nevertheless be getting cash, in addition to all the rest.
The capital market source adds, “Even if it is not acquired, NICE still has a reasonable chance to get along on its own. Despite the crisis, it has a degree of control in the market and good products. It won’t be a company with $5 billion sales, but it can be a company with $200 million sales.”
NICE’s biggest problem is that it expected to grow by 30%, while the digital recording market to which it directs most of its products is growing by only 10-15%. In order to grow at a faster rate than the market, it must either enter a rapidly growing market or acquire companies.
The rapidly growing market relevant to NICE is video management. As of now, Loronix controls this market. NICE entered the video management market in September 1999. This market, which is just getting underway, constitutes the company’s principal growth engine. This year the market is expected to total $120 million, with a 60% estimated annual growth rate. NICE’s market share of this market currently stands at 19%.
The voice recording products market, which accounts for most of NICE’s revenues, is relatively saturated. NICE is the dominant player in this market.
The parties at interest in NICE are mostly US institutional investors. Company employees hold options and shares totaling 25%. Discount Investments formerly had holdings in the company, but sold them during the second quarter of 2000. It can be assumed that this ownership structure is one of the key factors pushing in the direction of a merger with Comverse Infosys.
Published by Israel's Business Arena on January 2, 2001 |
