The romance between Amdocs (NYSE: DOX) and XACCT, which has been going on for years now, accompanied by endless bickering over price, looks set to be consummated soon. Amdocs recently hired offices in the building where XACCT is located, and the due diligence has got into high gear. According to industry sources, the merger should go ahead before too long, perhaps even within weeks, although it should be recalled that disagreement over price has proved a last-minute stumbling block more than once in the past.
The big question now is, at what price will the deal close? In 2002, XACCT's revenue totaled $20 million, and it is estimated that its 2003 revenue will not top $15 million. Apart from that, XACCT is still making losses, and is not expected to become profitable in 2003 (although sources close to the company claim that it began to record an operating profit three quarters ago). Moreover, although XACCT has raised some $87 million over the past six years, it has been left without cash for several months, and has begun to use its $10 million credit line heavily.
The lack of cash, and the fact that a further fund-raising round is not on the horizon, mean that the acquisition emerges as the most realistic way of continuing the company's activity.
Customers think twice
What's more, XACCT's financial position is liable to hurt its chances in competing for new tenders. Although its mediation product is considered the best around, it appears that customers have already started to think twice before signing contracts, fearing that the company may not stay in business long term. Amdocs is apparently aware of this, and it is fair to assume that it will exploit the situation to bring down the acquisition price.
It follows that Amdocs has no reason to pay a price reflecting a sales multiple of more than one. In other words, it should pay no more than $15 million, and, in the light of XACCT's debts and dearth of cash, perhaps even less.
However, the financial position is not the only aspect of this deal. XACCT brings with it several assets that are highly valuable to Amdocs. One such asset is a very respectable list of paying customers. True, Amdocs now has to find out which of XACCT's declared 75 or more customers can really be called that, that is to say, have not gone out of business, and have bought XACCT's mediation product and actually use it. But even after the customers that are customers on paper only are weeded out of the list, XACCT still has a worthy customer base.
Access to competitors' customers
This customer base holds two main advantages for Amdocs. One is that it includes customers that pay regularly for service and maintenance, generating a reliable revenue stream (though this is already part of XACCT's revenue). The other, more important advantage, is the door opened for Amdocs to its competitors' customers.
XACCT's product is currently installed at customers of Comvergys and Portal Software, and those of other companies that compete with Amdocs. Once Amdocs owns the product, it will gain a foothold at those customers, and direct access to them.
A second asset is the technology XACCT has developed. As we said, XACCT's mediation product is considered the best of its kind. Amdocs, by contrast, despite its attempts to develop a competing product, does not have a mediation product that works. Besides, Amdocs is well aware that the world is moving to IP communications networks, and that billing companies that want to survive must go over to IP billing.
At present, although it has developed new products, Amdocs has not come out with one capable of doing billing in real time, that is, while the communications activity to be billed is taking place on the network, and certainly not one capable of pricing very high volumes of data communications. This means that XACCT's product, which will provide it with the quantum leap required to go from traditional telephony to the world of data communications, holds very important advantages for Amdocs.
Amdocs is trying to develop its business in the banking market, which could yield labor and budget intensive projects. But unless it intends to give up on the telecommunications market, and it presumably does not, it urgently need a product such as XACCT has to offer. And XACCT knows this full well.
Another asset, one, which should not be underestimated, is XACCT's workforce, considered knowledgeable, highly qualified, and expert, to a degree not found in Amdocs at present.
It is not clear how Amdocs is supposed to translate the value of these assets into a price, and one may assume that there are sharp differences of opinion between Amdocs and XACCT over this question, and how much should be offset for XACCT's disadvantages, but in the end, it seems as though the price to be paid for XACCT should not be more than $20-25 million.
Gries's responsibility
Another matter exercising the minds of the negotiation teams of the two companies is XACCT's management and how it will be absorbed into Amdocs. At this stage, it is not clear whether XACCT CEO Eric Gries will remain at the company after the acquisition. It should be borne in mind that, as head of the company over the past few years, Gries carries a large share of responsibility for the fact that it has got through more than $87 million in six years, or over $14.5 million a year on average. Moreover, the lion's share of this sum was raised and spent in the past three to four years, and Gries was CEO for most of this period.
Sources inform "Globes" that, at the same time as the merger talks, Amdocs and XACCT have each been conducting acquisition negotiations with other companies. It could be that in each case, these other talks are meant to exert pressure on the other party.
Talks with Openet
Whatever the underlying intention, rumor has it that a meeting took place yesterday between representatives of Irish mediation company Openet Telecom, and the Amdocs negotiation team, with the sides talking at this point about a price of $20-25 million. Presumably, if the negotiations make progress, and if XACCT insists on an unreasonable price that Amdocs will not be able to explain to its investors, the price will fall.
It is not known what Openet's revenue for 2003 will be, or what its revenue in 2002 was, but according to IDC, in 2001 it had revenue of some $10.2 million, and a market share of 3.8%. For the sake of comparison, IDC puts XACCT's 2001 revenue at $20.2 million, and its market share at 7.5%. Since then, XACCT has had some notable wins, chiefly in tenders by US company Sprint, and Optus of Australia, but others as well. Its market share has therefore presumably grown. Openet does count among its customers operators such as Verizon and the Orange group, but there is no doubt that, in this respect, XACCT brings with it greater added value. Amdocs has in fact negotiated with Openet in the past, and it is quite possible that the renewed talks are intended to put pressure on XACCT.
XACCT's other suitors
At the same time, according to the rumors, XACCT has been talking to IBM and to IP billing company Portal Software, and in both cases the price mentioned is more than $20 million. Here too, the talks may be intended to exert pressure, this time on Amdocs. An examination of IBM's possible interest in acquiring XACCT reveals that it has no mediation product and that its integration arm, IGS, sometimes carries out projects that include a mediation element, and that in those projects it collaborates with mediation companies. Despite this, it seems unlikely that IBM will buy XACCT.
The word in the industry is that buying a software company that has developed a mediation product is not something IBM is focused on. For one thing, IBM has never been oriented towards billing or mediation. Secondly, among XACCT's shareholders is Sun Microsystems, a competitor of IBM, which would constitute a serious stumbling block.
The only thing that might prompt IBM to buy XACCT is the fact that HP has a mediation product. If IBM wants to have a similar product, it might be interested in buying XACCT. Nevertheless, the financial potential of mediation is not great. It is therefore likely that any desire on IBM's part to buy XACCT stems from the emotion generated by competition with HP rather than from pure business interest. All in all then, the probability of IBM buying XACCT seems low, although when it comes to billing, anything could happen.
As for Portal Software, communications sector players say there has never been a strong working relationship between XACCT and Portal such as could lead to an acquisition. Although the companies have customers in common, the products installed by each at these customers are separate. The sources say that acquisition by one company of another requires that they have deep knowledge of each other. On the other hand, Portal Software is interested in a mediation product.
Portal Software has $40 million cash. The likelihood that it will spend half of it on buying XACCT seems extremely small. On the other hand, Portal Software has a market cap of some $570 million, so that, if it did want to buy XACCT, it would most likely do so via a share swap. Then again, it is far from clear whether Portal Software is in a position today to digest the acquisition of another company, particularly one it does not know well. So the chances that Portal Software will buy XACCT are fairly small. In fact, Convergys, which has worked together with XACCT in the past, could actually be a more likely alternative.
A spokesperson for Amdocs said in response, "Amdocs examines dozens, even hundreds of business opportunities every year, as part of the routine of its business. The company does not comment on specific matters, or on this or that opportunity or rumor."
XACCT declined to respond.
Published by Globes [online] - www.globes.co.il - on October 14, 2003