Can Comverse Form the Backbone of an Alcatel Competitor?

Comverse Technology Inc. (Nasdaq: CMVT) yesterday published “selected unaudited financial results” for the second fiscal quarter of 2006, ending in July. Quarterly sales totaled $394 million, almost 9% above the analysts’ consensus. The company’s share is not behaving as if it were about to be delisted, rising over 8%.

Comverse subsidiaries Ulticom Inc. (Nasdaq: ULCM) and Verint Systems Inc. (Nasdaq: VRNT) also beat forecasts. This was actually predicted. Most of the analysts’ work that I’ve seen predicted that Comverse would have an excellent quarter. While it’s true that the media remains fixated on the whereabouts of former CEO Kobi Alexander, or about that odd Israeli private investigator who claimed to have found him, Alexander hasn’t run the company on a day-to-day basis for a long time. His disappearing act, to the extent that it’s a source for gossip, and that only, has no bearing on the company’s business.

Comverse operates in a sector that could be called upgrading telecommunications infrastructure, and it recently and rather aggressively entered the billing and customer relations management [CRM] fields with a fair degree of success. The completion of the acquisition of Netonomy will help Comverse in this area. Comverse’s general area of business is telecommunications infrastructure, where, as is also the case in retail and semiconductors, a whole lot of serious consolidation is going on.

Following the acquisition of Lucent Technologies (NYSE: LU), Alcatel (NYSE: ALA), a major competitor of Comverse, recently announced that it was acquiring various assets from Nortel Networks Inc. (NYSE: NT), yet another competitor of Comverse. Alcatel is a giant, whose annual sales before its acquisition of Lucent (another competitor) is $17.5 billion and profit is $1 billion. But what is Alcatel really? It is a smorgasbord of various telecommunications infrastructure companies that, thanks to proper management, became the industry leader.

If you were to take a large bowl, pour in Comverse, add Amdocs Ltd. (NYSE: DOX), ECtel Ltd. (Nasdaq: ECTX), ECI Telecom Ltd. (Nasdaq: ECIL), Check Point Software Technologies Ltd. (Nasdaq: CHKP) and Aladdin Knowledge Systems Ltd. (Nasdaq: ALDN), then stir in Alvarion Ltd. (Nasdaq: ALVR), AudioCodes Ltd. (Nasdaq: AUDC) and NDS Group plc (Nasdaq: NNDS) (since Alcatel recently entered the Pay TV market), and even toss in PowerDsine Ltd. (Nasdaq: PDSN) for spicing, you will end up with something resembling Alcatel, and which could compete against it in global markets.

I forgot to add Gilat Satellite Networks Ltd. (Nasdaq: GILTF) and a large part of RAD Group and all that the Zisapels could contribute to complete the recipe. Now you have an Alcatel look-alike telecommunications infrastructure company. Like Alcatel, such a conglomerate would be able to attract start-ups and stay at the forefront of technology. In fact, such a conglomerate would be better than Alcatel in many ways.

I’ve made such proposals before and been ridiculed by quite a few readers for them, but I remain convinced that such a grouping has three scenarios. First, all the companies mentioned will be acquired by Alcatel or another industry leader. Second, regrettably but surely, over time all these companies will remain grey and middling, or even worse, some of them will simply vanish. Third, learn from the history of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA), and imitate.

Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.