Comverse spent NIS 2b on restating financials, "Globes" finds

Moreover, the firm that is benefiting from restating Comverse's financials is one of the firms that signed the original financial reports, which turned out to be incorrect.

Last Friday, Comverse Technology Inc. (Pink Sheets: CMVT) published partial financial figures, and since they were terrible and below US capital market forecasts, the company's share price lost a third of its value to fall to a modest company value - in American terms - of no more than $1 billion.

The person who signed off on destruction of value at Comverse (besides the person who now resides in Namibia) is CEO Andrei Dahan, and the board of directors that appointed him. These 11 directors, one of whom is Dahan, were supposed to long ago hand over the keys, but they presumably will continue to serve in their posts, so it will be very hard for us to believe that a cure will be found for the company's pain anytime soon.

At its peak, Comverse had a market cap of $20 billion, a figure that is currently unimaginable.

Who profits?

Alongside the investors who have lost quite a bit of money by gambling on Comverse's share, there are some people who knew how to exploit the company's dismal situation. They are the accountants, lawyers, and other varied experts called forth four and a half years ago to the company's offices to help it restate its financial reports in the wake of the options backdating scandal, and who have not yet finished their work.

An investigation by "Globes" has found that in the four and a half years since February 2006, Comverse Technology has recorded $359 million in expenses on the task of restating its financial reports. The company did not report the payments for some quarters, so "Globes" estimated the spending for these quarters, resulting in the conclusion that Comverse has spent almost $500 million, or nearly NIS 2 billion, on restating its financials.

Yes, NIS 2 billion for restating financial reports for a few years; NIS 2 billion, most of which went to the company's accountants Deloitte, which is represented in Israel by Brightman Almagor Zohar.

$500 million is an unimaginable figure. Moreover, the fact that the firm that is benefiting from restating Comverse's financials is one of the firms that signed the original financial reports, which turned out to be incorrect, is simply absurd.

If you are still not convinced, here are some numbers for comparison to help you understand why the fees are all out of proportion to the actual work. Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), which has a market cap of $47.4 billion, paid its accountants, PricewaterhouseCooper, $18 million in 2009 to prepare the company's financial reports; Comverse paid more than double this amount for just one quarter.

True, there is more work in restating financial reports than in writing them for one year, but even taking Comverse's condition into account, the cost of the correcting its financial reports exceeds all proportion. For another example, Coca-Cola Company (NYSE: KO), the company that has gotten us addicted to carbonated sodas and is traded at a market cap of $129 billion, paid its accountant, Ernst & Young, $33 million in 2009, a fifth of the estimated annual payment by Comverse.

One more comment to conclude: Comverse Technology's current market cap is $1 billion. Its subsidiary Verint Systems Inc. (Nasdaq: VRNT) has a market cap of $742 million, and Ulticom Inc. (Pink Sheets: ULCM), in which Comverse Technology owns a 66% stake, has a market cap of $95 million. In other words, the capital market gives a value to Comverse Technology's core business of just a few hundred million dollars (especially if the company's cash reserves are excluded), which is only a fraction of the price tag at which Dahan once fantasized that someone would set to help him liquidate Comverse's assets.

The directors responsible for the destruction of value:

Chairman Charles Burdick. He took up his post in March 2009, and started as a director in December 2006. Comverse's website bio says, Mr. Burdick has an extensive background in telecommunications and media, with over 25 years experience in the industry. Until July 2005, he was CEO of HIT Entertainment plc, a publicly listed provider of pre-school children’s entertainment.

President and CEO Andrei Dahan since April 2007. Dahan's appointment was considered a surprise from the moment he took up the post. He came to Comverse after serving as president and CEO of Mobile Multimedia Services at AT&T Wireless Inc., a unit considered a failure and insignificant for the US telecommunications giant. Before AT&T Wireless, he held executive positions at Dun & Bradstreet Inc., Teradata Corp., Sequent Computer Systems and consultancy firm S.E. Qual.

Raz Alon has been a director since December 2003, and was interim CEO in May-November 2006, until the board appointed Dahan. For the past ten years, he has served as chairman of TopView Ventures LLC, which focuses on special situation investments in a broad range of industries. Before that, he was a director in the mergers and acquisitions department of Merrill Lynch.

Susan Bowick has served as a director since December 2006. She serves as a consultant to the joint venture of Nokia Corporation (NYSE; LSE; HEX: NOK) and Siemens AG (NYSE: SI; XETRA: SIE). She is also a guest lecturer at Stanford Graduate School of Business.

Robert Dubner has served as a director since January 2009. He is an independent consultant whose clients include silicon manufacturer Momentive Performance Materials Inc. and Noranda Aluminum Holding Corporation (NYSE: NOR). His CV shows that his expertise is in manufacturing.

Dr. Richard Nottenburg has served as a director since December 2006. He has a Ph.D. in electrical engineering and has served as president CEO Sonus Networks Inc. (Nasdaq: SONS), a developer of IP communications infrastructure, for the past two years. He previously served as EVP and Chief Strategy and Technology Officer at Motorola Inc. (NYSE: MOT).

Joseph O’Donnell has served as a director since December 2006. He was chairman, president and CEO of Artesyn Technologies Inc., a supplier of power conversion equipment, in 1994-2006. Before that, he was CEO of Savin Corporation and as president and CEO of Go/Dan Industries.

Augustus Oliver. Comverse does not state when he began serving as a director. He is a managing member of Oliver Press Partners LLC, the investment manager for Davenport Partners LP. In 1999, he joined WaterView Advisors LLC, advisor to a private equity fund specializing in media and telecommunications, which he continues to oversee.

A. Alex Porter. Comverse does not state when he began serving as a director. He is a founder and been principal of Porter, Orlin LLC since 1976. He is also a general partner of venture capital firm, The Caroline Company.

Theodore Schell has served as a director since December 2006. He is a managing director at private equity firm Liberty Associated Partners LLP. Before that he was managing director of Apax Partners, overseeing US technology investments. Apax owns the controlling interest in Tnuva Food Industries Ltd.

Mark Terrell served as non-executive chairman in December 2006-March 2008 and as a director since July 2006. He served as the Partner in Charge and Executive Director of KPMG's Audit Committee Institute in 2000-04.

Published by Globes [online], Israel business news - www.globes-online.com - on August 19, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018