The conclusion from the various reviews, commentaries and blog postings is that investors believe that Comverse's current value - $4.2 billion, of which $2.4 billion is represented by cash - quite definitely makes it an attractive target for a takeover. What's more, even a superficial examination shows that this value is a lot lower than that of the components. Such occurrences are commonplace in all kinds of holding and investment companies, but not in leading technology companies such as Comverse that have double digit growth.
On March 22, Comverse unveiled its financial report, presently still unaudited, for the fourth quarter of 2006 and the year as a whole. Its annual sales came in at $1.59 billion, a 33% increase, while its sales for the fourth quarter rose 24% to $415.1 million. The company's orders backlog for 2007 stands at around $800 million. The stock lost more than 41% from March to July 2006, and since reaching a low of $17, it has been making a wobbly climb upward with considerable volatility, something that is indicative largely of fear. Fear of what? The backdating inquiry, the fact that management may not look strong enough, or perhaps the lack of leadership. The relegation to the Pink Sheets has, of course, had its effect too.
Many institutional investors left (some of them because of regulatory requirements) when the stock was kicked off the S&P Index, and along with them went a large contingent of investors who stay away from the Pink Sheets. But this is a company that ended 2006 with sales of $1.6 billion and more than $2.3 billion in cash, and which has a stockpile of leading technologies that keep telecommunications infrastructures up-to-date and operational. So an investor looking for interesting investment opportunities should check out Comverse, because a company with the kind of figures that it has been posting and double-digit growth, that will continue to rise through 2009, is not something that can be found at these prices every day. The legal repercussions and the outcome of the inquiries have to be considered, since they are important, but at the end of the day, the company's value will be determined by the values it creates and not the inquiries.
Put it this way: Comverse is certainly no Lumenis. Lumenis disintegrated because of a management failure of the first order. But no such thing has happened to Comverse's business, and it would appear that the harm on Wall Street is far greater than that on Main Street, so let's have a look at just how the company is faring over there.
Daniel Meron says that there is more good than bad in Comverse's fourth quarter results. The good things are that on Main Street, both Comverse and its subsidiary, Verint Systems Inc. (NASDAQ:VRNT), are making impressive progress, and there is no sign that the inquiries have caused any harm. What, in Meron's view, are the bad things? Revenue has not grown at the consensus rate, and he is still not happy with the company's profit margins. That said, an analyst is required, ethically, to state that overall picture is not entirely clear, and that it is mixed.
The CIBC analysts reach a similar conclusion, that is to say that the stock is currently being influenced by several positive catalysts that are likely to unlock value. The analysts implicitly believe that the company, or parts of it, will be acquired in the near future. "Forbes" quotes Friedman, Billings, Ramsey Group Inc. analyst Daniel Ives who went as far to as to estimate the firm's breakup value at $24-$28 a share. Ives, like his colleagues at CIBC and RBC, sees the orders backlog as the optimistic aspect of Comverse's situation, and he too has mixed feelings about the company. But Comverse's main problem was highlighted last week by American Technology Research Inc. which actually downgraded it to "Hold" from "Buy." Its analysts quote and agree with everything that their colleagues at CIBC and RBC have written, with one exception. In their view, the rehabilitation process will not continue without a CEO to lead the company's networking division, which accounts for 72-73% of its revenue.
The reference here is to the departure of Zeev Bregman, who has been "blamed" by many for Comverse's business success. His successor, Yaron Tchwella, who takes up his post in April, is a manager with plenty of experience, but I get the impression that the American Research analysts did not intend to make a specific point but a general one, something like "this company is lacking a true leader," and that's something that I have been hearing from every direction ever since the Alexander affair broke, even though Koby Alexander was not really the one who led the company in recent years.
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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.