Financial Watch :Kenan, Lucent Part Ways; Post-Acquisition Woes

In mid-December, almost two years after he sold his company to Lucent for nearly $1.5 billion, Kenan Systems founder Kenan Sahin quietly left the telecommunications giant. By all accounts, the split was a mutual and amicable one, but looks could be deceiving.

At the time of its acquisition in January 1999, Kenan Systems was considered one of the top players in the LEC billing industry and was branching out to energy, utility and other market segments. But it appears Lucent had a different vision for the company.

“In my opinion, there was a need expressed by senior Lucent management to really focus on network-centric software, an area that has been fragmented by various business units within Lucent and therefore hasn’t proven to be as productive and as effective as we would have liked,” says Bob Kiburz, senior vice president of Lucent’s Software Products Group, which encompasses the Kenan products.

Kiburz, who has been with Kenan since before Lucent’ acquisition and has worked closely with Sahin for some time, is referring to software that touches the network, such as network and service management. This would include order management and provisioning. “Kenan was very much a believer in the product-centric model, in providing network-centric software and in providing customer-centric software,” Kiburz says. “The question was how do you create an organizational model to achieve the goals set by senior management to focus on the network-centric side.”

Kiburz adds that while Sahin played a very important and visionary role in structuring the Software Products Group, the several thousand other people in the business unit were also involved. “Kenan is a person with a broad personal reach,” Kiburz says. “He’s a very charismatic person, but at the same time businesses don’t run on personality ultimately.”

The view from outside is that Sahin became increasingly frustrated by Lucent’s perceived lack of commitment to the Kenan technology.

“Kenan was a very proud company developing cutting-edge billing and customer care products,” says Nikos Papageorgiou, vice president of equity research at Wit SoundView. “On the other hand we have Lucent, a telecom equipment vendor that was looking to offer additional software-based applications to complement its hardware offerings.” He adds that Lucent essentially has been offering billing and customer care almost as an afterthought.

“Lucent is thinking that they are competing against Nortel, so they’ll throw in the billing system when people buy equipment,” says Doug Ashton, managing director at Bear Stearns. “But billing systems are not universally applicable to everyone’s business model.”

Ashton suspects there are others within Lucent’s Software Products Group who would also like to move on. “How would you like to be part of the group where your technology is in the deal as a sort of throw-in?” he asks. “In my view, big telecom equipment companies are right to have an interest in the billing sector, but outright ownership is not necessary.”

Papageorgiou says that while the Kenan development team may prefer to work on billing and customer care for IP and wireless IP services, that is not Lucent’s forte. “GPRS and 3G are coming, but Lucent isn’t doing that great in IP services or GPRS; they are doing better in traditional switching,” he says. “Lucent is trying to change the focus from what the company had prior to the acquisition. As a result, Kenan Sahin was fighting with executives at Lucent, and that’s why he ended up leaving.” He goes on to say that Kenan became just another division within Lucent and was not operating as an independent company. “The bottom line is resource allocation; are you going to develop wireless IP billing services, which they won’t be able to sell?” he asks.

Also, since the acquisition, it doesn’t appear the Kenan Arbor/BP platform has advanced much, nor does it appear that the company competes at the same level it once did. “There are probably resource allocation issues within Lucent, and there are probably production issues out of Kenan,” Ashton says. “I’m not sure they’ve improved the product much since the acquisition.”

On the competition front, Kenan hasn’t announced many contracts since the acquisition. Kenan’s competitors “are telling me that they don’t seem to see Kenan that much anymore when they go up for contracts,” Papageorgiou says. “Before the acquisition, Kenan was a formidable competitor, but not so much anymore.”

Kiburz says the billing/customer care group has grown very substantially in several geographic regions, including Asia/Pacific, Latin America and Europe. He also adds that during the 4th quarter of 2000, Lucent put out new releases of Arbor.

“Maybe the perception is that the Kenan brand isn’t as well promoted and it becomes more of a Lucent branding,” Kiburz says. “That would be a fair assessment, but we don’t believe that our interest around billing and customer care has lagged. We believe the Kenan brand name has great value and we want to capitalize on that. At the same time, we have the issue of wanting to produce a broader portfolio of products and having to decide whether to extend the Kenan name or use Lucent’s name; our inclination is to use Lucent over time.”

Although Kenan the man has moved on from the company that bears his name, what’s left of Kenan Systems probably will continue to exist within Lucent. But to regain its past successes, Lucent may need to rethink how it operates the billing and customer care business. “I think the Kenan platform is a good product, and I think in different hands or if allowed to go its own way it might have value,” Ashton says. “This was a product that was ahead of its class by far, and the company always had a bigger focus in terms of target market than most billers did. I think it’s a matter of taking that asset and getting it into more productive use.”

Acquisition Blues

Some industry watchers may not have thought much of Lucent’s acquisition of Kenan two years ago and they may be questioning it even more now, but the overall topic of integrating a company and its resources after an acquisition goes beyond these two companies.

In March 2000, Sema Group acquired billing company LHS for a hefty $4.7 billion. Today, almost a year later, the acquisition still hasn’t impressed many. All indications are that the integration efforts between the companies have not gone well, and the stock hit a 52-week low in late 2000.

“They are trying to look like Amdocs, since Sema had the services and no product, and now they have both,” Ashton says. “The problem is that to implement that kind of strategy, the product has to be at a certain stage of effectiveness, and I just don’t think it’s there. It’s going to take too much work for them to get it to where it needs to go—and clearly it’s not going to be easy, as early difficulties are showing.”

To its credit, Sema released version 6.0 of the BSCS billing and customer care product in November. The new product includes support for mobile Internet services. “Sema is not a stupid company,” Ashton says. “Theoretically, there is a fit here [with LHS], but while they are trying to implement a strategy on a product they purchased, my personal belief is they made a mistake and it’s going to take too much work.”

A good example of an acquisition gone right is Amdocs and Solect, which occurred about a month before the Sema-LHS deal. So far, Amdocs has brought Solect smoothly into the fold, and the two companies have already pursued not only joint marketing efforts but joint product development. One of the keys to this acquisition’s success is that both companies were headed in the same direction prior to the transaction, Papageorgiou says. “They are both software companies and their models were very similar, which was not necessarily the case with Lucent and Kenan,” he says. Also, Amdocs has let Solect continue running very independently.

Another key reason why some acquisitions in the past year have found success while others have floundered has to do with the overall health of the CLEC market.

“The lower-end billing companies focused on the CLEC market have a major problem, as do all the OSS vendors focused on the CLEC market,” Ashton says. “What you’re going to see increasingly is smaller OSS vendors getting together, because they all wanted to go public and the public markets aren’t so viable now.”

He adds that the investment community wants to see software companies doing business with large carriers and in multiple segments. “That’s the problem with the CLEC market and with OSS companies all focusing on delivering to CLECs,” Ashton says. “Now that the CLEC market has shown it has no clothes, the OSS vendors have to migrate their businesses, and I don’t think most of these companies will make it through.”

While the decline in the price of many billing and OSS stocks has been affected in part by the crash of the CLEC market, caution on the part of ILECs, PTTs and Tier 1 carriers is also fueling the fire. “There are two trains of thought: As established telcos cut hardware, they’ll cut software as well; or they will cut hardware, but in order for them to be able to offer services they want and to utilize the network better and cut costs, they will have to spend more on software,” Papageorgiou says. “That’s the question most of us are trying to figure out and get some hard data on.”

Conventional wisdom says the CLECs will not bounce back in 2001; rather, many of them will go out of business because they are losing too much money. The billing and OSS vendors that either diversified their customer base prior to the slowdown in the CLEC market or whose management teams are coming up with business plans that don’t revolve around CLECs are the ones that will still be around in a year.a