Executives from Israeli mediation company XACCT Technologies have begun appearing with increasing frequency on campus at billing giant Amdocs (NYSE: DOX). First, XACCT executives turned up in the hallways. Then XACCT technicians began showing up for more than short visits. In fact, they've been at Amdocs for over a month now.
Moreover, sources inform “Globes” that Amdocs and XACCT recently decided to jointly bid for the billing and mediation tender published by Korean cellular operator KTF. The tender calls for a IT and mediation-capable billing system. Sources also inform “Globes” that Amdocs preferred participating in the tender jointly with XACCT, rather than offering its own mediation system, in order to improve its chances of winning the tender. Amdocs apparently is actively helping market XACCT’s system to KTF.
Amdocs has developed a mediation system, but industry sources claim XACCT’s system is in many ways superior. Industry rumors also claim that Amdocs recently halted development of its mediation system.
XACCT recently routed Amdocs in two large tenders: a $2-3 million tender for US giant Sprint (NYSE:PCS); and a $1-2 million tender for Australia’s second largest cellular operator, Optus.
By jointly participating in the KTF tender, Amdocs is admitting that XACCT’s system is better. In practice, it is offering KTF its own billing system, together with XACCT’s mediation product.
These circumstances, the frequent appearances by XACCT personnel at Amdocs and the joint participation in the KTF tender, raises the question whether there's any truth to the recent spate of rumors in the communications industry, especially among Amdocs staff, that Amdocs has begun a due diligence of XACCT’s technology, aimed at acquiring the company. We can assume that if Amdocs is carrying out due diligence, it is not intended to meet the needs of joint projects, since the two companies have been working together for three years now.
In light of these facts, some people at Amdocs asking themselves if the relationship between the two companies is about to get more intimate; i.e. if Amdocs is about to acquire XACCT.
Simultaneously, sources inform “Globes” that Amdocs staff have met people from Hewlett-Packard’s (NYSE:HPQ) mediation company IUM, to consider joint projects. That means that even if Amdocs is considering acquiring XACCT, it is also looking at other options. At this stage, it is unclear whether the meetings with IUM are intended to compare it with XACCT, or as an alternative to it.
In any case, if Amdocs is indeed carrying out technical due diligence on XACCT, and if the aim is to acquire the company, the move is not expected to take place any time soon. The two companies still face a process that will probably take many months at least.
It should also be remembered that XACCT has been chasing Amdocs for a long time. As “Globes” has reported in the past, Formula Systems (Nasdaq: FORTY) made an offer to acquire XACCT for $20 million. Considering XACCT’s sales and its diminishing cash reserves, the company’s value does not exceed $20-30 million. On the other hand, Amdocs needs XACCT’s mediation product. So, if Amdocs decides to acquire XACCT - and that’s a big if - it will be interesting to see what it will offer.
Even if Amdocs decides that strategically it should invest in XACCT now at a price exceeding its value, i.e. $40-50 million, that is still only 50-55% of the $87 million in capital XACCT has raised to date. In other words, XACCT’s investors will see a return of 50-55 cents on the dollar. While that doesn’t sound great, considering the current condition of the communications market, it’s not a bad deal at all.
It should be remembered that three years ago, Amdocs offered to acquire XACCT for $380 million, but XACCT refused to go below $500 million. But that was then, when the market was booming. This is now, and after the crash, an acquisition would be viewed differently.
More bad news
The bad news is not ending for Amdocs: the company apparently recently lost two important tenders. One was in Australia. At this stage it is unclear which telecom is involved, but a check among industry sources suggests it was Australia’s largest cellular operator, Telestra (ASX:TLS), and not Optus, the second largest. However, industry sources believe it might be Vodafone Australia, the third largest operator.
While Vodafone Australia is not a particularly larger operator, with only 2-3 million subscribers, if Amdocs lost the tender, then it is a strategic blow. While each Vodafone (NYSE; LSE; FSE:VOD) branch chooses its own suppliers independently, its subsidiaries exchange information, and each unquestionably examines the other's choices. That means that even if the loss has little financial cost, it has a strategic importance regarding other Vodafone subsidiaries.
Amdocs’ main problem with Vodafone is that it lacks one manager who handles all of Vodafone’s subsidiaries. Each Amdocs country manager deals with the local Vodafone company. It is possible that if Amdocs were to work with Vodafone as a single entity, its results would be better. Portal Software (Nasdaq:PRSF), Amdocs’ main competitor in the advanced billing field, has won Vodafone tenders in 12 of the 30 countries in which Vodafone operates.
Amdocs also lost a tender published by Japan’s third largest cellular operator, J-Phone. J-Phone is expected to overtake KDDI in 2003 to become Japan’s second largest operator.
J-Phone’s tender was for a sophisticated billing system that would support advanced billion cellular services for its 8 million subscribers. The winner of the tender has not yet been announced, but industry rumors claim the winner was Portal Software.
The total amount of the lost tender is unknown, but it can only be hoped it won’t force Amdocs to lower its forecast for the second fiscal quarter of 2003 (January-March).
Some good news, too
Last Friday, Yahoo! reported that Amdocs and US telecom giant SBC Communications (NYSE; LSE; XETRA:SBC) signed a contract under which Amdocs will upgrade SBC’s directory information technology system. SBC will also consider using Amdocs’ outsourcing services for some of its operations. The report stated that SBC may outsource to Amdocs the management and daily operations of its IT support and other services.
In early November, Amdocs told analysts that it was negotiating to win several outsourcing contracts that could be considerably greater than the average deal. Amdocs said its average deal was $13 million. In other words, the SBC contract may reach $20-25 million, amounting to 10% of Amdocs’ annual revenue and making SBC a major customer.
Amdocs is a billing company. If it goes through, the SBC deal means that Amdocs increasingly pushing its way into the business of integration companies like Accenture (NYSE:ACN). If this trend continues, Amdocs may find it harder to claim it is a product-based company.
Another issue is Amdocs’ collaboration with integration companies. Will Amdocs’ increasing competition with integration companies affect its collaboration with them in long-term billing contracts? And to what extent?
The statement implies that the SBC deal is under negotiation, but the fact that it was made at all, suggests that Amdocs believes it will win it. The good news is not necessarily in the size of the deal, but in its strategic importance.
In principle, Amdocs is roughly offering what every billing company is offering. At the practical level, i.e. technical solutions, Amdocs suffers from specific product gaps compared with its competitors. Telecoms examining advanced communications services technologies are increasingly not giving Amdocs preference.
Therefore, it's good news whenever a customer selects Amdocs to upgrade its system, especially when it's a strategically important customer like SBC. The choice signals other US telecoms and the market that SBC is satisfied with Amdocs’ system.
An Amdocs spokesman said in response, “Regarding XACCT, Amdocs regularly examines investments and acquisitions all over the world, in accordance with its mergers and acquisitions policy. The company will not confirm or deny any report or rumor regarding these matters. As for the rumors about the halt in developing Amdocs’ mediation system, the company obviously cannot comment on any matter relating to its product development policy, since it relates to confidential commercial information. As for the report about tenders lost in Japan and Australia, the company does not divulge details about tenders in which it is participating.”
Published by Globes [online] - www.globes.co.il - on December 17, 2002