Financial Watch : CSG Diversifies Through Acquisition; Success and Failure

At the end of August, CSG Systems announced it had purchased IBM’s telecom customer billing system and related assets. The purchase includes IBM’s Integrated Customer Management System (ICMS). Although neither company disclosed the terms of the deal, most analysts place it at well under $15 million, with some even guessing that it falls in the $5 million to $7 million range.

This acquisition comes just about eight months after CSG shelled out around $300 million to buy the Kenan billing and customer care assets from Lucent.

The deal continues IBM’s strategy of selling off specialized software that is not an integral part of the company’s business. However, IBM will remain very active with its former assets even after CSG takes them over. “IBM will probably remain involved on a contract basis, so it looks like a very collaborative effort going forward,” says Peter Giglio, an independent research analyst. He adds that CSG will likely have a relationship with the core IBM consulting business, as well as with the PwC consulting business, which IBM is in the process of buying. IBM also retains most of the service revenues from the billing business.

This close tie to IBM’s consulting arm allows CSG to broaden its relationship with key systems integrators, Giglio says. “If you look back to the pre-Kenan days, you have CSG as a primarily service bureau business and doing the integration themselves. As they brought on Kenan, they started working more with systems integrators and broadening its global reach, and this is further penetration into the integration market for CSG,” he says.

In addition, the acquisition moves CSG further into the international market. IBM’s billing business had about 35 customers worldwide, including such Tier 1 players as AT&T Canada, NTL, Telecom New Zealand and SaudiTel. “In terms of the customer list, it’s pretty good and opens up perhaps a few more doors for Kenan over the long term,” says Mike Latimore, senior equity analyst at Raymond James & Associates. “IBM has relationships with a lot of companies in Europe and the Asia-Pacific region, so now these are potentially in the pipeline for CSG.”

The acquisition also gives CSG the much-needed ability to diversify beyond its core business in the U.S. cable market. However, that cable presence could be in jeopardy if CSG loses its lucrative contract with AT&T Broadband, whose merger with Comcast will be finalized by the end of the year. For more about this contract dispute, see “AT&T Broadband and CSG: When Contracts Go Bad,” Billing World and OSS Today, June 2002, page 42.

Latimore adds that companies like Amdocs are seeing cable as a future competitive area, so for CSG to already have that customer base is a nice position to be in, especially if it can migrate those customers to Kenan voice and data capabilities.

Stand or Fall

Over the summer, three OSS companies quietly went out of business. AP Engines, Proxima and Quintessent all succumbed to the recent troubles in the telecom space.

“You’re seeing consolidation by shuttering happening for a number of reasons,” Giglio says. “One is the core customer base of a number of these companies were the alternative carriers like CLECs. Also, Quintessent was in the interconnect business. The overall failure of these carriers as well as regulatory rulings that have been more favorable to the incumbents have hurt the overall funding arena for the venture capital groups.” He adds that the VCs that are still investing in this space are looking for the top one or two players in an area. “They are also probably limiting it to their portfolio companies and giving those guys the resources to get through this current environment.”

Latimore points out that companies like the troubled Williams and XO Communications that were once building a lot of next-generation infrastructure and next-generation OSS were the ones that were really supporting these new OSS companies. “A lot of these OSS companies grew out of an emerging service or an emerging service provider sector, but when that was not around, the vendors don’t have so much to rely on after that,” he says.

The news is not all bleak for OSS providers. In the past few months, several companies have received additional rounds of funding. Provisioning vendor Alopa Networks received $12.5 million in July, and service assurance company Comnitel gathered an additional Euro 10 million (US$9,796, 300) of funding. In September, billing vendor TeleKnowledge secured $5.5 million in new funds.

That these companies received such significant amounts of venture capital speaks volumes for their respective business plans. However, it isn’t as easy to get VCs to cough up the cash as it might have been two years ago. “It took [Alopa] nine to 12 months to get this money,” Latimore says. “It’s a general comment on raising money nowadays. But the ones that are raising money clearly have passed a very high hurdle and high levels of due diligence.”