Comverse: Private Equity Target?

May.22.07 | About: Comverse Tech (CMVT)

Yesterday’s news that Alltel (NYSE:AT) was being purchased for $24 billion by a private equity consortium sent investors scrambling to try and find the next telecom company that may be in play. This news sent companies like Amdocs (NASDAQ:DOX) soaring over 6.5% on speculation that they could be next in line. IBM and SAP were mentioned as potential suitors. One company that seems to be ripe for the picking is Comverse Technology (NASDAQ:CMVT).

Comverse has been embroiled in the options backdating scandal and was sent packing by the NASDAQ. Now they find themselves trading on the pink sheets. With probable board nomination and the naming of former AT&T Wireless executive Andre Dahan as the new CEO, it seems that the company is priming itself for some kind of takeover.

On the business side, the company has been performing well. 2006 sported a 33% increase in sales over ’05 at $1.59 billion, and they were showing an order backlog of $800 million heading into ’07. With a market cap of $4.2 billion and a large stockpile of cash, currently at $2.3 billion, the company is trading at a slight premium to sales.

In coming up with a potential value for the company, you also need to have a look at their subsidiaries, which include Verint Systems (NASDAQ:VRNT), a leading provider of analytic software-based solutions for communications interception, networked video security and business intelligence, and Ulticom (OTC:ULCM), a leading provider of service enabling signaling software for wireline, wireless and internet communications.

Most analysts have discussed a breakup value of the company at around $28 a share. I think that they are missing a crucial point. Comverse currently owns a privately held company call Starhome, a provider of roaming services and converged solutions for Mobile Network Operators, which would have been public by now had there not been all of these scandals. And rumors have it that Starhome could go public at a market cap north of $500 million. This should add about $3 or so a share, so that should get us to over $31 as a breakup value.

With the trend in private equity to pay high premiums, I think that Comverse could fetch an attractive price for investors and payoff handsomely for the acquirer in a few years when all the scandals have passed and the market realizes the full value of the company.

Disclosure: Author's fund is long CMVT.PK

CMVT.PK 1-yr chart:

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