The saga of the acquisition of mediation company XACCT Technologies by billing giant Amdocs (NYSE: DOX) refuses to reach its final chapter. Sources inform “Globes” that, belying persistent rumors that a deal is about to be closed, Amdocs recently put the acquisition into deep freeze. This is no coincidence. So far as is known, Amdocs estimates that XACCT has used up its $10 million credit line, and that time is in Amdocs's favor.
Nevertheless, it cannot be ruled out that a deal will be concluded within months. In the meantime, XACCT shareholders might extend more loans to the company, but if they don’t, it is uncertain how the company will pay salaries in the coming months. XACCT presumably has about 80 employees, and if that number is inexact, the number does not exceed 100. A rough calculation shows that the company burns $1.2 million a month.
The real question is different: to what extent is it worthwhile for Amdocs to enter the mediation sector, and at what price? Although periodic leaks from the negotiating room mention a $30 million price tag for XACCT, Amdocs might calculate that is too high and not worthwhile.
As always, the primary calculations are the company's revenue and the size of its potential market. Although rumors claim that XACCT posted $22 million in revenue in 2002, and somewhat more in 2003, an examination of XACCT's contracts from 2002 and the number of its offices and employees shows that its revenue in 2002 could not have exceeded $20 million, and might only have totaled $18-19 million.
XACCT's revenue in 2003 probably declined considerably, in part because industry players realized that the mediation market was much smaller than originally estimated. Therefore, while it was possible to predict XACCT's 2003 revenue at $15 million a few months ago, it now appears that the figure will be even less than that.
But even if XACCT manages to achieve sales of as much as $15 million in 2003, Amdocs has no reason to pay more than $25 million for the company. $25 million represents a multiple of 1.6, which is very high, considering the mediation market's potential. As "Globes" recently reported, Amdocs might be willing to pay an additional $2-3 million on certain conditions, but it's hard to imagine that it would agree to any more.
In any event, the mediation market's potential is one of the most critical parameters in calculating whether it is worthwhile entering the sector, and at what price. A rough calculation shows 15-16 large companies currently operating in the sector. The average contract is $1.5-2 million, and there are many contracts worth no more than $500,000-1 million.
In view of the fact that most of the major telecommunications operators already have mediation systems, and since the market is growing very slowly, the most optimistic mediation market potential probably is only $200-300 million in 2004-05, at an aggressive estimate.
For Amdocs, that means that its mediation market potential, after acquiring XACCT and taking Amdocs's selling power as a billing giant into account, is about $20 million a year, plus or minus $1-2 million.
To put matters into perspective, a mid-sized Amdocs contract is $20-40 million. In other words, the annual revenue that Amdocs would gain from 10-13 mediation deals is at the lower end of the range of the value of a single average billing contract, and more contracts, we should note, means more employees.
Furthermore, one indication that the mediation market potential is smaller than originally thought is the fact that Hewlett-Packard (NYSE:HPQ) recently merged its IUM mediation division with its software division, HP OpenView.
In other words, Hewlett-Packard, which had set up a large mediation unit and had become one of the leading suppliers in the market, recently concluded that the mediation market would not generate the kind of big money it once thought. Unquestionably, there is money to made in the sector, but, as I said, not on the scale previously imagined.
Another important criterion for measuring how worthwhile it is for Amdocs to enter the mediation market by acquiring XACCT, is the technology. XACCT's systems have many advantages when it comes collecting information from IP networks over those of Amdocs. Presumably, Amdocs is aware of the great importance of collecting information from IP networks, particularly when the communications market is now on the verge of the data communications revolution.
Besides, now that Amdocs has begun winning more tenders, it will not want to revert to the dark days of 2000-01, when its competitors, except for Convergys (NYSECVG), succeeded in winning tenders and contracts at its expense thanks to their IP billing systems.
Basically, if Amdocs integrates voice mediation systems with XACCT's IP mediation system, it will probably be able to come to customers with an interesting offering.
But XACCT is not Amdocs's only option. As "Globes" reported a few weeks ago, Amdocs is also negotiating with Openet Telecom, an Irish mediation company smaller than XACCT. Communications market sources claim that Openet's IP network information collecting technology is by no means inferior to XACCT's. So far as is known, Openet recently beat XACCT for five tenders in the US.
Openet does not publish financial information, but its website states that its revenue in the 2003 fiscal year was 75% higher than in its 2002 fiscal year.
For now, the status of the Amdocs-Openet negotiations is unclear, but what is clear is that Amdocs has options, and its bargaining position vis-à-vis XACCT strengthens with every day that passes.
Unquestionably, an acquisition price of $20-25 million, or even $30 million, is negligible for a giant like Amdocs, and Amdocs unquestionably needs XACCT's technology. For all that, it is worth bearing in mind that Amdocs president and CEO Dov Baharav was previously the company's CFO. Although he is aware of the important technological advantages XACCT could bring to Amdocs, after his many years as CFO, he is probably is the last man to whom something can be sold for too high a price.
In any event, whatever acquisition price is finally worked out, the bank debt and owners' loans (if any) have to be deducted from it. Furthermore, as with every acquisition, Amdocs will probably not hire all of XACCT's employees, and XACCT's shareholders will have to bear the severance costs.
Amdocs and XACCT declined to comment on this report.
Published by Globes [online] - www.globes.co.il - on November 18, 2003