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Convergence Drives M&A

The shift towards converged networks and services has prompted Comverse Technology Inc. (Nasdaq: CMVT) to shell out $251 million for the Global Software and Services (GSS) division of CSG Systems International Inc. (Nasdaq: CSGS). (See Comverse Buys CSG Unit.)

The move, announced Friday, gives Comverse post-paid billing and associated OSS system capabilities to add to its existing pre-paid billing capabilities, and gives the company a host of new major operator customers, including (NYSE: BT; London: BTA), India's Bharat Sanchar Nigam Ltd. (BSNL), (NYSE: CHA), (NYSE: FTE), (NYSE: TI), and various parts of the Vodafone Group plc (NYSE: VOD) empire.

Comverse claims to have more than 400 service provider customers, including most of the world's Tier 1 carriers in North America, Europe, and Asia/Pacific, for its messaging platforms and pre-paid billing systems, though it has been stronger in the mobile sector to date. (See GPC Selects Comverse MMSC, Comverse Unveils MMS Exchange, Cingular Picks Comverse IM, and Comverse Markets i-mode.)

The acquisition, due to close before the end of January, pitches Comverse against the billing sector's two heavyweights, Amdocs Ltd. (NYSE: DOX) and Convergys Corp. (NYSE: CVG).

The news left Converse's share price unchanged Friday at $25.29, while CSG's stock rose 31 cents, more than 1 percent, to $22.21. In midmorning trading on Monday, Converse shares slipped $0.52 (2.06%)to $24.77.

The GSS division, which has 900 staff, comprises the former Kenan Systems business that CSG bought from (NYSE: LU) for $300 million in December 2001, and the ICMS billing and customer care business that CSG acquired from IBM Corp. (NYSE: IBM) in 2002. (See Lucent Sells Software Unit for $300m and CSG buys billing assets from IBM .)

GSS has about 150 service provider customers, with Comverse saying there is little customer overlap. In the second quarter of 2005, the GSS business recorded revenues of about $42 million, and its operating loss was equivalent to about 3 cents per CSG share.

Comverse CEO Zeev Bregman told a conference call audience that the deal gives his company a better spot in the converged billing market. "Many current systems are focused on a single service and are inflexible and have high costs of ownership. Carriers want systems that can support fixed, mobile, pre-paid, and post-paid services," he said, adding that converged billing is set to be the sector's biggest growing segment, driven by IMS (IP Multimedia Subsystem) deployments. (See IMS Takes Over the World and IMS Guide.)

Rival Amdocs remains unthreatened by Comverse's convergence strategy. In an emailed response to questions, the billing giant noted: "Communications providers are moving toward IP services, an evolution that has been ongoing for a number of years. Comverse's acquisition of CSG's GSS Group recognises that fact, but does not change the solutions available to the marketplace... [Tier 1 carriers are] looking for highly-sophisticated systems to help them roll out new products and services as well as deal with industry consolidation. The Comverse acquisition doesn't address this marketplace need, as it will only have a point solution for billing, using systems integrators for the service work."

Comverse believes it can absorb the GSS business without too much damage to its earnings, and that GSS will be slightly accretive to the firm's 2006 net income, excluding adjustments and costs related to the acquisition.

In its most recent announced quarter, ended July 31, Comverse posted net income of $34.8 million, or 16 cents per share, on revenues of $285.8 million. The company's revenues were up 22 percent year-over-year, and its profits had more than doubled.

In a research note, analysts at Lehman Brothers described the move as a "long term strategic positive for Comverse in that it enhances the company's billing portfolio and may provide significant growth opportunities into the 2007/2008 timeframe as the nascent converged billing market gains momentum." Lehman's team also believes Comverse may make further acquisitions to add to its next-generation wireless messaging portfolio.

While Comverse was basking in a positive glow, CSG's management, under new CEO Ed Nafus, came under pressure from analysts on a CSG conference call about the value and timing of the sale, with some wondering why CSG hadn't shopped the business around more and sought a higher price. One Citigroup analyst said he was surprised that the price was lower than CSG's original purchase price, given the investment made in the Kenan systems during the past three to four years. (See CSG Names New CEO.)

Nafus told the conference call that the deal allows CSG to focus on its "core competencies in the cable and direct satellite markets," where Amdocs and Convergys are also major players. The CEO added that the convergence trend in the telecom services sector means that even greater size and scale are needed, something that Comverse hopes to deliver by taking GSS on board.

CSG will reap about $220 million in net cash from the sale after costs and taxes, some of which may be used for acquisitions.

The deal is the latest in a series of billing sector acquisitions, with Amdocs involved in the most significant moves. (See Amdocs Buys Into Cable, Amdocs Buys Chinese Firm, and MIND CTI Buys Sentori.)

Followers of the telecom billing sector will have watched the value of the business founded and built up by Kenan Sahin shrink during the past six years. Lucent bought Kenan in 1999 for nearly $1.5 billion -- now it's valued at one sixth of that price.

— Ray Le Maistre, International News Editor, Light Reading

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