In light of digital recording solutions provider Witness's acquisition of Eyretel, Lehman Brothers head of technology research Tobias Fischbein today reiterated his "1-Overweight" rating for NICE, which operates in the same field. Witness acquired UK-based Eyretel for $59.8 million in cash.
"The Eyretel acquisition by Witness follows the consolidation process that NICE ignited last year when it acquired Thales Contact Solutions (TCS)", said Fischbein. "While NICE is likely to face somewhat tougher competition in the quality monitoring (QM) niche, this remains a relatively small portion of NICE's overall business. Therefore, we would expect this latest acquisition to have little or no impact on NICE's core business areas.
"Based on attractive valuation we reiterate our '1-Overweight' rating on NICE shares". Fischbein expects the stock to outperform the unweighted expected total return of the industry sector over a 12-month investment horizon.
"NICE's acquisition of TCS in November 2002 ignited the consolidation process in the fragmented digital call recording and QM industry. The Eyretel acquisition is the second major move and reduces the market fragmentation further. We estimate, based on Datamonitor figures published in 2002, that NICE continues to be the leading digital recording player with total market share in the range of 23%-25%, now followed by Witness with 16%-18%, and Verint with 14%-16%. There are several other smaller players as well".
Fischbein made note of a seeming weakness to the Eyretel acquisition; "Even though Witness is offering Eyretel shareholders a seemingly attractive 150% premium to Eyretel's market value on Feb 20, the deal reflects a relatively low EV/Revenues multiple of 0.33 (based on Eyretel's sales in the year to Sept 30, 2002). This is about half the multiple at which NICE acquired TCS (based on the adjusted $47m transaction value and TCS's sales of close to $70m in 2002).
"Arguably, Witness being the acquirer represents somewhat less of a threat for NICE than would have otherwise been if a close business partner such as Cisco Systems (CSCO), or a major competitor such as Verint Systems (VRNT) bought it.
"Nevertheless, we expect NICE to face tougher competition from Witness primarily in QM-focused deals, and to a lesser extent in the broader contact center recording market. Witness will continue to lack the strong hardware-based recording platform on top of which NICE integrates its application software offering".
"Also according to Datamonitor research, the Witness-Eyretel combination would become the market share leader in the contact center QM and compliance market, with about 29% of that specific niche".
"Is Verint going to make the next major M&A move in the contact center market? We doubt it. With 64% of its business in the growing digital security and surveillance markets, we believe any major M&A efforts by Verint will be likely focused on expanding its communications interception (wiretapping) and video surveillance technologies and market presence".
Published by Globes [online] - www.globes.co.il - on 27 February 2003