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Analysts Mull NetCracker's New Buy

Ray Le Maistre

The news that NEC Corp. (Tokyo: 6701)'s Service Provider Information Technology (SPIT) subsidiary Netcracker Technology Corp. will acquire Convergys Corp. (NYSE: CVG)'s Information Management telecom software business unit for $449 million has generated varied responses from the analysts who follow the telecom software sector. (See NEC to Buy Convergys Unit for $449M.)

Heavy Reading Senior Analyst Ari Banerjee has already stated that he believes Convergys IM is a good fit for NetCracker. (See NetCracker Plays End-to-End Game.)

Infonetics Research Inc. Directing Analyst Shira Levine is also positive. "I understand the rationale behind the acquisition," she notes in an emailed response to questions. "In many ways, NEC is following the lead of Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. , etc. in beefing up its software business as equipment becomes commoditized and margins continue to decline for that business."

And she believes NEC is getting a good deal, "given the significant investment that Convergys has made in the IM business over the years."

Levine does have concerns over NetCracker's post-acquisition challenges. The Convergys unit will be a "pretty big mouthful for NEC/NetCracker to swallow. ... Convergys will be integrated into the NetCracker portfolio, and I think that will be a difficult endeavor."

However, Analysys Mason partner and head of Telecoms Software Research Larry Goldman believes NEC/NetCracker stands to make a good job of assimilating Convergys IM.

"We expect that Convergys IM will remain a strong or slightly stronger competitor as a result of this acquisition," states Goldman in a research note shared with Light Reading. "Previous acquisitions of software suppliers by network equipment suppliers have notoriously destroyed valuable businesses, but NEC showed with its acquisition of NetCracker in 2008 that it was able to preserve the independent value of an established software business. By organizing Convergys IM in the NetCracker unit, NEC is signaling its intent to preserve that same independence."

He does agree with Levine on the main reason behind NEC's decision to acquire the Convergys unit, as he sees the move as a way for NEC to lessen its dependence on equipment sales, especially in Japan.

"The most fundamental motivation for NEC in this acquisition is to strengthen its software and services offers. ... IT services is already a bigger business within NEC than selling carrier equipment. This acquisition strengthens its position outside of Japan and complements its existing NetCracker OSS products. The billing area is not a fast-growing segment, but NEC can reasonably hope for increased services business that accompanies all billing and customer care implementations."

And like Heavy Reading's Banerjee, Goldman expects NEC to invest in its new assets once the deal closes. "We think it is likely that NEC will invest in strengthening some aspects of the IM products, particularly in real-time rating and charging. We also expect NEC to apply its strengths in implementation services to the Convergys products business, making NEC overall a more complete supplier, and reducing Convergys IM's dependence on third-party integrators."

And it's not just integrators that stand to lose out. Goldman notes that "Convergys is Alcatel-Lucent (NYSE: ALU)'s preferred billing systems supplier for deals where Alcatel-Lucent is the prime integrator in network operator solutions." (See Major Vendors Kiss OSS and AlcaLu, Convergys Team Up.)

Now it's likely AlcaLu will need to find another independent billing systems vendor with which to team up, just like it had to after Ericsson acquired its previous billing partner LHS in 2007. (See Ericsson Buys Billing Vendor LHS and LHS, AlcaLu Team Up.)

— Ray Le Maistre, International Managing Editor, Light Reading

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