Financial Watch : LHS Comes Full Circle; Cingular-AT&T Wireless and Billing

In the latest merger and acquisition, the BSS telecom software products of Schlumberger—known by the name LHS—were acquired by an investment firm headed up by Hartmut Lademacher, the founder of the former LHS Group. Financial terms of the transaction were not disclosed.

Back in 2000, Sema Group shelled out $4.7 billion to acquire billing vendor LHS Group and its popular BSCS billing and customer care product. Just a year later, Schlumberger, an oil, gas and utility services company, acquired Sema Group and its holdings for $5.2 billion.

Operating under the SchlumbergerSema banner, the LHS products continued to find global customers. But like other instances when companies spent a lot of money to buy billing and OSS products even if that was not their core business—for example, Lucent spending billions for the Kenan assets and then selling them off to CSG Systems for a fraction of the price—Schlumberger looked for a buyer and found one in the original owner of the LHS line of products.

“As so often happens, the founder has a better insight into what it will take to turn the company around,” says Pete Sokoloff, managing director of Peter A. Sokoloff & Co. “Anybody inside the industry would tend to look at [the LHS assets] and devalue it due to an overlap they would experience, and an outsider would get nervous because of the recent trend with telecom. Only someone who understands the assets better than anyone and has use for every asset the company has would make sense to do the deal.”

According to Stefan Sieber, chief marketing officer of LHS, the transaction was done through private equity with no other hardware or software vendors involved. Lademacher made the deal through investment firms General Atlantic Partners and LHS Beteiligungs, which formed LHS Acquisition specifically to conduct the transaction and will keep the LHS name.

LHS becomes an independent software firm, but it has the advantage that the LHS products are installed with more than 130 customers across the wireless, wireline and IP segments worldwide, including Orange, Swisscom, T-Mobile and Vodafone. The company will continue to focus on fixed and wireless providers as well as railway companies operating GSM-R networks.

Sieber says there are a lot of advantages to coming into the market as an independent player. “Over the years we saw a trend that most large integrators or outsourcers wanted to have their own product in-house, such as CSG with Kenan and Convergys with Geneva,” he says. “The trouble is you have to sell these projects in a very direct way to the marketplace, and it’s increasingly hard to work with partners. We have a clean product house and can work with several integrators that can multiply our reach to the market.”

Sieber adds that prior to its acquisition by Sema Group, a major part of LHS’ revenue came through channel business. “It’s only over time that you develop your own business where accounts can mature; it’s less interesting for the large SIs because the project has already happened.” He says that the new LHS will not compete in the SI business.

Sokoloff says that now we are seeing fewer and larger billing vendors, so it is refreshing to see someone new enter the arena. “On the plus side, [LHS] is independent and entrepreneurally run; on the downside, they come into an extremely competitive wireless billing market.” He adds that although it’s becoming harder to win new business, LHS does have a measure of stability because of its established Tier 1 base.

“If you have an installed base of Tier 1 customers, you’ll get recurring business and the benefits to an uptick in spending,” says Michael Latimore, senior equity analyst at Raymond James & Associates.

Sieber, who along with Lademacher was with LHS Group prior to its acquisition by Sema, says they had been looking at buying back the LHS assets for some time because of the way the assets were being handled by SchlumbergerSema. “We looked at the situation and saw how parties like Schlumberger and Sema have an orientation toward systems integration, but product development was not made public at all,” he says. “There were no press releases on new versions of the product and no announcements on deals except in regard to systems integration. Something was dying there.” Sieber adds that the LHS software products had been successful under Sema and Schlumberger with a stable number of contracts from year to year. But he says that he and the group that bought back LHS felt that the potential was not achieved for the LHS line.

Going forward, the new LHS has big plans to regain its position as a well-respected name in the billing industry. The company will be headquartered in Frankfurt, Germany, but Sieber says an emphasis on Central and Latin America and the Asia-Pacific region will likely take place. “Our main goal is to bring ourselves back close to the customer.”

Sieber says that rather than competing with a powerhouse like Amdocs, LHS sees itself in the same league as Convergys and CSG Systems.

“Years ago when we started the business, we had to conquer markets,” Sieber says. Today we need a sound customer base, which we have to keep and extend, and we have to find new business.”

Carrier Consolidation and the Back Office

The recent $41 billion offer that Cingular extended to AT&T Wireless has the potential to impact not only consumers, but the many software vendors involved in supporting both carriers.

While billing and OSS software may not have made or broken this mammoth wireless consolidation, it will be something to consider closely as the two providers go about the daunting task of bringing their businesses together.

“Cingular has stated that one of the big projects it will work on is IT systems consolidation,” says Latimore. “This will take a lot of planning and several years to implement; over the long term they don’t want to have numerous billing systems in different regions.”

One vendor that has reason to be optimistic of the acquisition is Amdocs, which has a long-term affiliation with Cingular that goes back to a 20-year relationship with SBC. Cingular is a joint venture between the domestic wireless divisions of SBC and BellSouth.

“We feel that strategically it plays to our strength because we are focused on Tier 1 and Tier 2 players and try to work closely with consolidation,” says Michael Couture, vice president of marketing at Amdocs. “Any Tier 1 with millions of subscribers on separate systems will want to bring it together, not only for cost savings but also to offer a consistent brand experience.” Couture is quick to add that Amdocs is not assuming that it will be the sole billing provider of a combined Cingular-AT&T Wireless in the future. “Our agreements don’t allow us to be complacent at any time,” he says.

Currently, AT&T Wireless is in the middle of an outsourced billing contract with Convergys for GSM billing, but whether Convergys will be out at the end of the term is anyone’s guess.

Sokoloff speculates that in the short term, Cingular will probably do very little to its billing systems. “I’m not sure that in the short term they save money by tampering with the systems,” he says. “Conversion will be expensive, and it’s remarkably difficult to take a large-scale billing system and convert it over.” He adds that a billing conversion can lead to revenue leakage and some duplication when launching new programs. For example, it might be difficult to track an AT&T customer who is now a Cingular customer.

Sokoloff says that when a smaller company is acquired, it makes sense to do a conversion and provide a homogenous work environment. “But when it’s two huge companies coming together, eventually you’d want to integrate billing. If I were the CEO or CFO, I’d want to know when contracts for both vendors come up and let them slug it out.”

While we’re not likely to see a winner-take-all prize fight for Cingular’s billing business, we will probably see significant back office changes down the road.



Note: The information in this article should not be used as the primary basis for investment decisions. The information is based on sources BillingWorld & OSS Today believes to be reliable. The statements expressed are not necessarily those of Billing World & OSS Today.