VCs Cash In on Cramer

This week saw one of the biggest OSS acquisitions in recent years when billing giant Amdocs Ltd. (NYSE: DOX) announced it is buying inventory management specialist Cramer Systems Ltd. for $375 million in cash. (See Amdocs Snaps Up Cramer.)

That sum is notable for a number of reasons.

First, it's ten times Cramer's funding. The British company has been backed to the tune of about $36 million by Broadview Capital Partners , Harbour Vest Partners LLC , and Kennet Capital .

Broadview pumped in $22 million in 2000 and held a 24 percent stake, according to documents filed with Companies House in the U.K., while Kennet seeded the company and added a further $3 million in 2000, giving it a 21 percent stake.

Harbour Vest added in about $11 million in December 2004 in a funding round that wasn't publicized. It's not clear what stake it holds, nor how much of the company the management holds.

None of the VC investors returned calls seeking comment.

Second, it's nearly five times Cramer's current annual revenues of about $80 million (to the end of April 2006), according to numbers given out by Amdocs on a conference call. And with the acquisition due to be dilutive to Amdocs' earnings by 4 cents in fiscal 2007 (October 1, 2006, to September 30, 2007), a $375 million price tag could be deemed very high.

Other inventory OSS acquisitions have been at the one- to two-times revenues mark in recent years. (See Comptel Enhances Its OSS and Telcordia Shells Out at Last.)

Those concerns were reflected in Amdocs' share price Wednesday, when it dropped 80 cents, more than 2 percent, to $33.45. But then Amdocs announced record third-quarter revenues, and the shares leaped 10 percent to $36.80.

Both Amdocs and Cramer have talked about the inventory firm's growth and profitability, but Cramer's company filings show that revenues have been solid if unspectacular. In 2004, when Cramer started talking about potential IPO plans, it posted revenues of £37.4 million ($69.5 million) and a profit of £6.2 million ($11.5 million) in the 12 months to the end of July. (See Cramer Preps an IPO.)

But a year later those revenues were up only slightly to £39.2 million ($72.9 million), and profits halved to £3 million ($5.6 million).

Amdocs CEO Dov Baharav reckons Cramer can achieve quarterly revenues of $20 million to $25 million once the acquisition is completed, a process expected during the current quarter. He also believes the Cramer business, which will form a new OSS division within Amdocs, is capable of annual growth of 30 percent in the next few years.

So has Amdocs paid too much? After all, it has been desperate to get its hands on an inventory player for a few years, having "evaluated a number of companies," admits Amdocs marketing VP Mike Couture, and has been courting Cramer for more than 12 months. (See OSS Business Is Buoyant and Telcordia Nearly Blew Granite Deal.)

OSS Observer analyst Larry Goldman thinks it's a "high price given other market valuations," but notes that Amdocs isn't known for overpaying. Also, Amdocs sees this deal as very strategic -- giving it an OSS and billing/CRM systems portfolio it can pitch to large carriers that want to deal with as few suppliers as possible.

Goldman adds that Amdocs has a good track record of making the most of its acquisitions and, probably most importantly, has "an excellent services organization."

This is where the real growth potential comes in. Cramer has been a product company that has worked with systems integration partners such as IBM Corp. (NYSE: IBM) and HP Inc. (NYSE: HPQ), but now "the acquisition gives Amdocs a lot of service opportunities that go with inventory system implementations."

Goldman's colleague Patrick Kelly agrees. "The price paid reflects demand in the inventory and network resource management market, and is in line with market opportunity and overall growth that Amdocs will be able to obtain from Cramer assets," writes Kelly in an email.

Amdocs' Couture says simply: "We're confident we can realize on the valuation."

Those assets include a recently expanded product set, more than 400 staff (not all of whom will be retained), and more than 50 customers, including BT Group plc (NYSE: BT; London: BTA), BellSouth Corp. (NYSE: BLS), and a host of other Tier 1 operators. (See OSS Firms Jump on IMS, Cramer Unveils New OSS, Telstra Outlines Massive OSS Project, Cramer Gets T-Soft, Nixes IPO, Telefónica Picks IBM, Cramer, and Cramer Wins at TeliaSonera.)

That gives Amdocs the number two player in the inventory management market, behind Telcordia Technologies Inc. and ahead of MetaSolv Software Inc. (Nasdaq: MSLV) and Netcracker Technology Corp. (See OSS Firms Shake Up Market.)

Goldman, though, says Telcordia's poll position is courtesy of its legacy position with the RBOCs, and that Cramer is the leading player in the new generation of inventory OSS systems.

— Ray Le Maistre, International News Editor, Light Reading

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