Once Saville Systems missed Wall Street estimates three quarters in a row, the acquisition vultures began hovering over the beleaguered customer care and billing systems vendor. When Saville’s stock lost four-fifths of its value and hit the $10 mark for the second time in six months the vultures finally moved in. UK consulting company, Logica and European systems integrator and outsourcing company, Sema Group, were rumored to be likely buyers but the $1.4 billion telecommunications giant, ADC Telecommunications, stepped in to purchase the company for $660 million in a strategic move that echoes Lucent’s $1.48 billion acquisition of Kenan Systems in January.
Saville, a Canadian company masquerading for tax reasons as an Irish software house, began to hit the wall when it attempted to move its customer care and billing software from AS/400 to Unix over a year ago. The painful transition lost it customers, eroded its revenues and depressed its stock. The company had been experiencing very good demand for its AS/400 products but, as deregulation spread, it was faced with an international market that was more interested in Unix customer care and billing software. That’s where the problems started, says Hampton Adams at Volpe, Brown, Whelan & Co.
In its most recent first quarter through March 1999 license revenues were down to $3.4 million, from $8 million in the same quarter last year. But, more importantly, service revenues, traditionally the strongest part of the business, also shrunk from $29.9 million in Q1 1998 to $26.4 million in 1999. The company had also been suffering from the consolidation in the market place kick-started by Lucent and then continued by Alcatel when it made its play into this market via the purchase of Amdocs. Saville may have recognized that going it alone in a market that was rapidly consolidating was not the best way forward, says Bob Switz, CFO at ADC Telecommunications.
Saville will be ADC’s third foray into the software business. Traditionally a telecoms hardware company with a consulting arm, ADC bought Metria, a British performance management software company in 1996 and NewNet, a wireless networking and telephone tapping software company, a year later. Although customer care and billing software may be an odd mix to add to this seeming hodgepodge of software, ADC claims Saville’s Convergent Billing Platform (CBP) fits well since it builds on the operational systems support software it already had in place. Saville’s billing software will be the front-end around which we wrap our other software products, says Switz. Saville will be the foundation on which the company builds a Software Systems Division into which NewNet and Metria will be integrated.
Although Saville had hit a financial quagmire in the past couple of quarters, it had a steady historic growth rate. In the 1997 to 1998 period, company profits grew 13.4% to $27.1 million on revenues up 56.7% at $167.7 million. Saville will continue growing, albeit at the slightly slower rate of 30% to 35% per annum under ADC, according to Switz.
This would seem to be a reasonable growth rate, say analysts. CIBC Oppenheimer estimates the corporate expenditure on telecoms software last year was $18 billion, of which customer billing and operational systems support was a multi-billion dollar segment, destined to grow 30% per year. Analysts at Communications Research are more specific. The multi-billion dollar segment was actually worth $2.5 billion in 1997 and will grow 96% to $4.9 billion by 2000, it projects.
The growth explosion being witnessed in this market has been driven by telecoms deregulation and the influx of new carriers that has flooded the market in recent years. A customer billing system is one of the first software systems a new entrant requires. There is no point providing a service if you can’t bill your customers accordingly, says Eric Zimits at Hambrecht & Quist. Furthermore, the convergence of cable operators and telcos is only likely to increase the demand for customer care and billing systems which can charge a customer for all its services in one hit and insure customer loyalty through a sophisticated back-end database that tracks customer requirement and needs, say analysts.
Not only will ADC target CBP at its existing installed base of customers that buy traditional telecoms hardware but it will also go after the regional Bell operating companies (RBOCs) market as well as Independent Local Exchange Carriers (ILECs). The company also has a software module that enables telecoms service providers to integrate the SavilleCare call center desktop with the providers’ billing and other business support systems. And there’s SavilleExpress GSM, a pre-configured module that, through the SavilleExpress modular billing platform, supports the billing of services using the GSM standard for wireless telecoms.
Although the 30 to 40 customers that currently use CBP will no doubt be gratified to know that the future of the product suite lies in the hands of a financially flourishing parent – ADC’s profits rose 34.8% to $46.7 million on revenues up 18.5% to $1.4 billion – Saville’s investors were not entirely happy about the premium they will receive when the transaction closes in October. This is a ridiculous valuation – these guys have excellent product, and a sizable and respectable customer base – apparently, that’s their real value/strength. I expected them to be bought out around $30 or $25 at least, says one investor. ADC will exchange 0.358 of its shares for each ordinary share of Saville, valuing Saville at $17.94 a share.
Wall Street did not react favorably to the deal either. ADC’s share price has dropped since the deal was announced. Our stock’s fallen because analysts are worrying about the usual execution risks, plus the fact we’ve diversified further out of our core business, which creates further uncertainty. Some investors are no doubt concerned that we won’t be able to reverse Saville’s tide of poor quarters and that hasn’t helped us either, says Switz.
This sentiment was borne out in an conference call to Wall Street outlining the rationale behind the acquisition. Analysts stated that Saville had told them they should expect a turnaround in the second half of the year. The premium the company was prepared to accept indicated that an upturn in company revenues would not happen in this time frame, they argued. ADC’s acquisition history did little to boost confidence either. ADC has always made opportunistic acquisitions. Saville’s current travails make it fit that model, says Adams.
Unfazed by the negative reaction this acquisition has generated, ADC will continue to make acquisitions to broaden out its software portfolio. We’re not quite done yet, says Switz. Likely acquisition targets include internet billing software companies that provide payment systems over the web, such as TAI, Solect Technology and Belle Systems. Internet billing is still a separate market but when it starts encroaching on our business we will get into it, says Switz.
