Comverse Technology

(Nasdaq:CMVT) has been negotiating to buy Israeli startup

CTI2

but the talks bogged down over the price. Now another obstacle has arisen, at least from Comverse's perspective. Its archrival Openwave Systems (Nasdaq:OPWV) today announced that CTI

2

will be supplying it unified messaging, email and wireless services.

CTI

2

and Comverse both develop value-added services for communications, including messaging services, unified messaging, cellular messages and e-mail. During 2000 Comverse negotiated to buy CTI

2

, but could not agree on a price. Openwave was created by a merger of Phone.com with Software.com with the explicit goal of becoming a world leader in messaging.

Openwave is facing serious competition from Comverse after the Israeli messaging giant acquired another Israeli company,

eXalink

, which supplies router-based gateways and applications software to deliver Internet-based services to wireless devices. Another major rival is

NTT Docomo

of Japan.

At its peak Openwave was worth over $30 billion. Nowadays it's worth $8 billion.

The contract with Openwave opens a door for CTI2

Openwave has been moving fast. On January 31, Openwave announced an alliance with

Cisco Systems

(Nasdaq:CSCO) to build a system together that would allow consumers to check email, voicemail and fax via a single voice call.

CTI

2

CEO and founder Erez Marom told TheMarker.com that the it will also benefit from Openwave's agreement with Cisco. "We're playing with the big boys now," he said. "We are extremely pleased about the deal with Openwave, which opens doors for us to the company broad customer base, which contains 75% of the communication provider market," he added.

CTI

2

was founded at the end of 1996. The company employs 80 people. In its last round of financing about six months ago it secured $16 million at a post-money company valuation of $165 million.

The company dubs its services, which enable employees to manage communications from any location using diverse communication devices, "a virtual office." Its main customers are Internet service providers, telcos and cellular carriers.

An irrevocable commitment

Openwave is growing fast and is expected to report sales of $420 million for 2001, with marginal earnings of 2 cents a share. But arch-rival Comverse is noted for its financial soundness. It expects revenue to reach $1.5 billion in 2001 and earnings per share to amount to $1.75. As for price-earnings ratio, Openwave trades at P/E ratio of 117 for earnings estimates 2001, while Comverse is traded at a P/E of 62.

Marom says that before the deal with Openware, CTI

TheStreet Recommends

2

was an indirect competitor against Comverse. Now the competition is direct.

It may sound a little presumptuous for a startup to compete against a $20 billion public company, but Marom does sound optimistic. The following are translated extracts of comments he made to TheMarker.com.

TheMarker.com: How does the agreement with Openwave position you in the industry ?

Marom:

The alliance places us on the same side as Openwave, which has joined Cisco. On the opposite side is Openwave's competitor, Comverse. Openwave and Comverse are very different. The Comverse systems are considered more closed, as opposed to the American firm whose systems, as the name indicates, are more open.

This suits our strategy. Openwave aspires to become the future operating system for messaging, and believes that the base to all messaging and value added services is going to be the directory and the mail, that is why we are comfortable joining it.

Comverse on the other hand believes that voice mail will be the basis for all services... Comverse is the only one that can upgrade them and provide further added solutions.

In other words, buying from Comverse is the equivalent of an irrevocable commitment.

We believe that it is impossible to keep controlling the customers. Openwave's challenge today, and ours too, is to attempt to penetrate this captive audience. (Israeli phone company)

Bezeq

too, which has been using Comverse solution for years, has realized that it is not worth its while to remain in captivity, and has approached us.

Does the collaboration with Openwave block the possible future acquisition of CIT2 by Comverse?

Marom:

Our association with Openwave is strategic.... We have offers, but are not currently negotiating with any company.

Last year it was said that your shareholders felt Comverse's offer ws too low. Did Comverse let this one get away? Will your value rise in view of the deal with Openwave?

Marom:

Our value will increase now, there is no doubt of that. Today we have a 200-strong total customer base. Subsequent to the Openwave deal, we expect dozens of new installations in the next year...

Obviously when we are a big company, with a strong income stream, many systems deployed and several large customers, our value will be enhances by far.

Word is that Comverse was willing to pay $300 million at the time.

Marom:

We are proving that CTI

2

can be an independent company. It is possible that the exit for shareholders won't be in the form of a sale but in a form of an IPO. In any case, we aren't focusing on this right now. We are focusing on building a successful company. There is no doubt that Openwave will assist us in that.

Where does Cisco fit in the deal with Openwave?

Marom:

Our mix of solutions complements Openwave's solutions... Openwave is officially informing all its customers that they can now have our unified messaging services as an add-on. So far this collaboration has brought us four large new customers.

Beyond the fact that we are penetrating Openwave's broad customer base, we have signed lateral agreements with companies that will carry out the installations, including

Hewlett Packard

(NYSE:HWP) and others which are currently installing for Openwave...

Cisco is a hardware provider. It provides the gateways. But Openwave solutions and our own are software-based. Cisco was looking for a entry into the telephony market. It already had presence in the Internet market.

That's why collaboration Between Openwave and Cisco is two-sided, Cisco will provide its hardware to existing Openwave customers, but at the same time bring Openwave new clientele, because with Cisco we are typically talking about immense multimillion projects, Openwave will benefit, and so of course will we.