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NightFire Sparks Takeover Talk

NightFire Software Inc., a maker of inter-carrier service provisioning software, is raising eyebrows over at Siebel Systems Inc. (Nasdaq: SEBL), according to industry insiders, who say its wireless number portability software makes it a tasty takeover target.

NightFire's purported tastiness stems from developments at the Federal Communications Commission (FCC) -- which celebrates its 69th birthday today, by the way. The startup has developed some software that could become hot property if the FCC goes ahead as expected on November 24 and passes a new rule that will impose local number portability (LNP) on wireless service providers. This would require them to offer customers in local markets the opportunity to take their phone numbers with them when they switch to alternate providers.

The regulation has carriers up in arms, as analysts predict that as many as 40 million people in the U.S. will carry their number over to a new provider next year. Roger Entner, an analyst with Yankee Group, forecasts that churn rates could increase from 2.8 percent to 6 percent a month, which means that a carrier's profitable period could be reduced to as little as four months before the subscriber moves on and the carrier has to start the process all over. Verizon Communications Inc. (NYSE: VZ) is particularly upset about this threat (see Verizon Grumbles at FCC Ruling).

NightFire and another insightful startup -- Evolving Systems Inc. -- could cash in if the FCC gets its way. Both sell software that automates the number portability process between carriers.

"Handling the switching process is taken care of manually today by carriers, but with the volumes increasing because of number portability, they will have to automate the process," says Venkates "Swami" Swaminathan, founder, executive VP, and chief strategist at NightFire. He says AT&T Wireless Services Inc. (NYSE: AWE) is readying software from NightFire that will enable it to automate number portability.

Swami declined to comment on speculation that Siebel is in acquisition talks with NightFire, although he said the two firms have tied Siebel’s CRM (customer relationship management) software with NightFire’s inter-carrier provisioning software. "It would be a little premature to talk about an acquisition," he says, although he adds that NightFire is always looking for ways to grow faster -- and mergers and acquisitions are among them.

Bart Schachter, a VC at Blueprint Ventures, an investor in OSS companies BayPackets Inc. and Atreus Systems Inc., agrees that number portability will be a major issue for carriers.

"They can circumvent it by making customers sign five-year contracts and charging them $500 to switch providers, but they still have to put the systems in place to make it happen," he says.

Regarding an acquisition of NightFire by Siebel, most analysts say it’s not yet clear whether generalist software companies like Siebel or even Microsoft Corp. (Nasdaq: MSFT) want to dig into the telecom software market as deeply as this. A spokeswoman at Siebel said she was unaware of any talks going on with NightFire.

"I think we are more likely to see startups acquiring other startups in the OSS market first," says Schachter. "Public companies are still very reluctant to make acquisitions because of the tremendous amount of scrutiny on them today and the pressure on their stock and earnings."

NightFire has raised a total of $51.8 million in funding, closing its last round of $16.5 million in June 2002. Investors in the company include: New Enterprise Associates (NEA), The Roda Group, Sequoia Capital, Telecom Partners, and U.S. Venture Partners.

— Jo Maitland, Senior Editor, Boardwatch

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