SAN FRANCISCO -- Amdocs' (DOX) - Get Report purchase of Architel Systems (ASYCF) may lead to consolidation in the billing-software niche as companies seek to broaden their offerings and maintain their competitive edge.
St. Louis-based Amdocs develops software that builds billing systems for telecoms. Toronto-based Architel makes software that tells routers and switches which services to turn on for a customer. Executives at the companies expect the combined concern to offer one-stop shopping for everything from orders to billing.
"This was a strategic move for us," Amdocs CEO Dov Baharav said in a telephone interview. "We can provide everything from the back office to the front office." With the added sales of Architel's products, he predicts Amdocs' license revenue will rise to 15% of total revenue from 11% now.
The roughly $400 million stock swap values Architel at $24.52 a share, a hefty 57% premium over Architel's 15 43/64 closing price Tuesday. Architel's shares on Nasdaq rose 26% Wednesday to 19 11/16 after rising as high as 22 15/16. Amdocs fell 14% to 22 3/16.
Analysts said they weren't surprised by the premium Amdocs offered. "It looks like a lot, but Architel is a very good company,"
Warburg Dillon Read
analyst Michael Agarwala says. "It looks like they also priced it so that there wouldn't be any threat of anyone else coming in." Warburg Dillon Read has not underwritten for Amdocs or Architel.
The deal, forecast to close in June, will be structured as a pooling of interests and is expected to be neutral to earnings at the end of Amdocs' fourth quarter ending Sept. 30, and accretive in the following year. Baharav predicts the combined company will show annual revenue growth of at least 35%.
In addition to selling more products, Amdocs also expects to capitalize on service business that Architel is currently giving to third parties to handle. Baharav said, "Architel is giving away a lot of revenues to third parties right now, and giving away control of those accounts." He believes the parties that maintain and service the systems are the ones who have ultimate control of the accounts.
"Amdocs remains one of our favorite ideas in the billing sector," said
BancBoston Robertson Stephens
analyst Marianne Wolk, whose firm has underwritten for Amdocs but not for Architel. Because of the proposed merger, she lowered her fiscal year 1999 earnings estimate for Amdocs to 41 cents per share from 44 cents. Architel has on its balance sheet "nearly $9 million in annual nondeductible amortization expenses related to its June 1998 acquisition of
. As a result, net income
for Architel has been negative." But she expects earnings for Amdocs in fiscal 2000 of 63 cents per share, in line with estimates from
Agarwala is more of a hard sell. He concedes that the purchase will broaden Amdocs' product portfolio, and the industry will probably move toward providing the full array of software that the merging companies hope to offer. But it's not clear how the two will cross-sell products or how combining them will help overall revenue grow, he said
Agarwala questions whether the customers of each company will mesh with the other. Amdocs' specialty remains with high-end customers who may not need Architel's products because they alrady have in-house systems or are using products from a company like
. Lucent recently bought
, which provides billing software.
But Tony van Marken, president and CEO of Architel, argued that Lucent would not be a major competitor because Lucent and Kenan would be limited to providing software for Lucent's own hardware. The combined Amdocs-Architel would have no link to a specific hardware vendor and could work anywhere with any telecom, he said.
So whether the deal actually acts as a boon to Amdocs' near-term revenue growth remains far from certain. But what is certain is that this deal will probably lead to more mergers and acquisitions in the sector.
"We've now seen three deals in this area: Lucent and Kenan,
, and Amdocs and Architel," Agarwala said. "This should trigger other activity."
Wolk agreed, saying, "
appear the most attractive public targets. ... At 10 times revenues, Saville and ITDS would trade in excess of $40 each -- a significant premium over current valuations."