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Verint's $514m Purchase Of KANA Opens Lines Beyond The Call Center

|Includes:Verint Systems Inc. (VRNT)

By Scott Denne

In its biggest deal in almost seven years, Verint (NASDAQ:VRNT) has expanded its ability to analyze customer interactions beyond the call center, spending $514m for KANA Software. While the deal is strategically sound - and a bit of a bargain - it will add to an already heavy debt load.

With the purchase, Verint adds KANA's messaging, social, and email analytics to its own speech and text analytics, in the hope that customers will be drawn to its ability to integrate customer sentiment data across multiple channels, such as traditional call centers, social media and online chats. It's an area that's been neglected by its rivals, so the deal gives Verint's product suite a leg up. Also, the two companies have already integrated their technologies at the request of some common customers, so some of the technical risk is gone from the deal.

KANA, which started in the call center and spent the last few years buying up companies to bring it new capabilities, expects to bring in $130-140m in revenue and more than $20m in EBITDA during 2014, up from $53m trailing revenue and negative EBITDA leading up to its take-private deal in late 2009. That means Verint gets the company for about 3.5x projected revenue, which is about standard for software acquisitions, but still about a full point above Verint's own projected-sales valuation.

The deal makes strategic sense for Verint by giving it exposure to an area its rivals have neglected; however, it's not without risks. It's paying $100m of its own cash, or about three quarters worth of free cash flow and more than one-third of what's on its balance sheet. Already a bit debt-heavy, the $414m in loans Verint will use to finance the remainder of the deal will raise its debt/equity ratio from 1.08x last quarter to 1.69x.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: VRNT