What comes to mind when you hear the words Comverse Technology Inc. (Pink Sheets: CMVT.PK)? The answers that most people would give are similar: The massive options backdating scandal that surfaced in 2006; the flight to Namibia by founder and former chairman and CEO Kobi Alexander; and the still unfinished restating of company accounts. And there's more: a further restatement of accounts, due to improper revenue recognition and the incorrect recording of certain balance sheet items; changes in the company's management and board line-up; and instability and uncertainty.
It would be safe to assume, therefore, that such associations as the company's technology, chances of tender wins, contented staff or returns for, shareholders are not the first things that automatically come to anyone's mind. Anyone save, that is, for Comverse's new management and board, who prefer to focus on the future and forget the past.
Less than one month into his tenure as the new Comverse CEO and president, the role previously filled by Alexander, Andre Dahan exudes confidence as if he had been with the company since the days when it was called Efrat. In his first interview with "Globes" he makes a point of referring to the company as the "new Comverse Technology" and the present situation as the "Comverse Technology's new era." "I'm optimistic he insists.
But what is the real state of Comverse today? It's difficult to tell. One big enigma. The managers wish to focus on the company's future, so we'll take another look at the company's unflattering past: in March 2006 revelations came to light about the options backdating, and it emerged from the US Securities and Exchange Commission (SEC) inquiry that Alexander, company CFO David Kreinberg, and legal counsel William Sorin had falsified the exercise dates of options, so as to generate maximum profit for themselves and employees. The rest is known. Alexander is now a fugitive, Kreinberg is awaiting sentencing, Sorin has already begun serving his own jail sentence, and the company has still not completed the restatement of its accounts. And if that weren't enough, Comverse has announced a further Phase II inquiry into its revenue recognition, which is due to be completed in the near future.
What is known is that the Comverse group ended 2006 with revenue of $1.59 billion and an operating loss of $39.9 million. The restatement expenses are likely to reach $314 million and higher. The company's market cap on the Pink Sheets, to which it was relegated at the beginning of the year, is currently $4.8 billion.
Comverse Technology is the parent company, which is managed by Dahan. The activity of the group, which has its headquarters on Manhattan's Seventh Avenue, includes Comverse Inc., which provides software solutions for data communications and multimedia companies, as well as billing solutions. Comverse Inc. currently managed by Yaron Tchwella, who recently took over from Zeevi Bregman. The other companies are Verint Systems Inc. (Pink Sheets: VRNT.PK), which is managed by Dan Bodner, and provides software solutions for digital recording analysis; Ulticom Inc. (Pink Sheets: ULCM), which provides networking software solutions for wireline and cellular communications and Internet; Starhome, which provides mobile roaming technology and value added services, and which is still looking for a buyer or the key that will open the door for it to an offering on Nasdaq; and Startel, which provides integrated voice and data solutions. In all, Comverse employs 7,750 people, 6,000 of them at Comverse Inc. (of which 2,500 are based in Israel).
"We're beginning a very positive period for Comverse," declares Dahan, "We're now working on a strategic plan, in which we're making an organized and methodical analysis of the company's businesses, and this will lead us to the right conclusions about the company's future. In the short-term, we will identify all those things that are weak and which weigh down company profitability, and in the medium term we'll launch initiatives that will boost our growth and will focus on growth areas. In the third stage, we'll put it all together and come out with an action plan for Comverse Technology. We need to make sure that the subsidiaries are in the right markets with the right products, and to make the right decisions for shareholders, customers and employees."
Globes: What happened up till now?
Dahan: "These things weren't done because the company in New York was managed differently, as an investment company. It has a lot of fantastic assets such as customers, cash and employees, but there needs to be an improvement in the company's performance and a specification of its growth area. We're now embarking on a move that is unique in the history of this company, which grew from nothing to revenue of more than $1 billion. We're a large company, and we need to act differently today, to be more methodical in our decisions and to adopt a sharp vision. One thing for sure is that we are not a bank or an investment bank. We deal in technologies, and I don't think our investors want us to be another investment bank. We'll leave that to the people who are in those markets."
I'll put it this way: Who needs the Comverse Technology headquarters and you? After all, Comverse Inc. is managed by Yaron, Verint and Ulticom are independent and the holdings in them - which at present amount to equity only - could be sold, and Starhome is due to make a public offering of its own.
"I see you're telling us what to do, so why don't you come and work for me in New York as a strategy review assistant," Dahan replies, losing his patience slightly. "Speaking seriously, we're working according to the three-step method that I have just outlined - short term, interim, and long-term - and at the end of the process we'll reach a conclusion about how we should operate as a business. We have a lot of options, you mentioned just some of them, and I don't know how we'll emerge from this process. What is certain is that one of the things that will guide us is value for shareholders."
And do you have a mandate, hypothetically, to decide that there is no need for the headquarters?
"Yes, and that is one option that will definitely be considered. As far as progress in the program is concerned, I plan to complete the first review of the operation this week, and we will then begin working on the conclusions."
An Israeli with a deep American side
Dahan (58) is half-Israeli and his Hebrew is excellent, although the interview with him was conducted almost entirely in English. He immigrated to Israel from Morocco in 1968 and stayed for the next twelve years. He graduated from Hadassah College in Jerusalem with a degree in software engineering and began his working career database architect, holding positions at Malaam, Israel Aerospace Industries Ltd., and IBM Israel. "At the beginning of the 1980s I left to go and work abroad. I planned to stay for a year or two and then return, but like many Israelis, I never did," he says. Before joining Comverse, Dahan served as president and CEO of mobile multimedia services at AT&T Inc. and before that he served as President of North America and in several other executive positions at Dun & Bradstreet, as well as senior manager at NCR. His career has taken him to a number of other computer companies over the years, and he is presently a director at Red Bend Software, and recently left a similar role at IXI Mobile. In short, he has 30 years experience in wireless and IT.
Dahan says the costs of the Comverse Technology headquarters in New York are low, but his impressive salary package has raised a few eyebrows. He will receive a basic salary of $1 million a year, in addition to a 100% bonus on reaching agreed milestones, and 200% in the event that he exceeds them. During his time at AT&T (in 2003 for example), the cost of his salary was $4.6 million a year, of which $640,000 was his basic salary and $980,000 was a bonus.
Let's talk about your salary - after all, you are half Israeli and you're aware that people are very interested in how much managers earn - isn't it too high?
"I know that people here take note of salaries, and I accept this, just as I accept all the challenges in my job. The truth is that my salary is in line with the standard rate at global companies the size of Comverse. I have not been given any guarantee by the company, and my bonus will be based on performance and the meeting of milestones. So while I understand that this interests Israelis, ultimately we are a US company with access to the US capital market."
Do you feel that the fact that you are half Israeli was one of the considerations in the decision to appoint you?
"I imagine that it was to a certain degree, although not from the point of view of American-Israeli identity, but rather, culture. It was important to the board that the person who takes over the management of the company understands the culture in Israel, since our 2,000 employees are an extremely serious resource. That said, I have lived in the US for 28 years now, and it would be difficult to say that I'm Israeli. The American side runs much deeper."
Investment banks relate that while board member Raz Alon served as acting CEO, there was lot more willingness on the part of Comverse Technology to consider merger and acquisition options for its subsidiaries. The plan was reportedly as follows: the sale of Comverse Inc. to a company such as Nokia, China's Huawei, Alcatel-Lucent, or Nortel; the sale of Comverse Technology's holdings in Verint and Ulticom, and the sale of Starhome, all of which would be done in order to make the shareholders happy. Dahan, however, is in no rush.
"As you can probably imagine, because of the problems that the public believed Comverse was facing, there were many occasions on which bankers came to talk to us about mergers and acquisitions," he says, adding, "To be honest, there wouldn't be any logic in it until such time as we define our journey and the road we intend to take. They say, 'hi, we'd like to help you with this or that asset,' but it's too early for us and our pace is different. We don't have any plan to build a big strategy and only begin implementing it after three years; I believe that we will move forward in smaller steps, all of which will be within the context of the strategy. We'll identify the growth areas and focus on them without losing growth or our market position.
"As for acquisitions that the group itself could make, we're flying the plane but we're looking around 360 degrees at everything that's happening in the market."
Do you think that there was this kind of talk about perhaps selling parts of the company in Alexander's day, when he controlled the company and its board?
"I don't think he controlled the company as you say, but I would really rather not talk about Kobi. I don't know him, but I am starting to get to know him through his achievements at the company. Comverse was managed back then as a portfolio, like you manage holdings, and we intend to change this."
The restatement of accounts is still far from over. What is the timetable for this?
"Phase II of the review will be completed within days or weeks, and we will then forward the material to our accountants. The entire senior management is very keen to get this done, so that we can go back to being a reporting company, and enter an era of transparency. It's a substantial job, I don't want to underestimate it, but we'll complete it as soon as possible."
And what promise do the investors have there won't be any more skeletons in the cupboard, that there won't be a third affair that will necessitate a review of the financials?
"We've done some comprehensive and serious work. I am not exaggerating when I say that hundreds of thousands of entries have been examined. We didn't find anything that hadn't cropped up earlier but again, this is what we know today. I am not expecting any further surprises, over and above what we have uncovered."
Published by Globes [online], Israel business news - www.globes.co.il - on May 30, 2007
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