NICE takes a bigger slice

The CRS acquisition looks fine - if the technology strategy works out.

Hadass Geyfman 12/4/2005

Haim Shani never rests on his laurels. After his success in raising NICE Systems' (Nasdaq: NICE; TASE: NICE) share of the European digital recording market, he has now set out on the next mission: buying his largest US competitor Dictaphone CRS. The acquisition enables NICE to extend its hold on the US digital voice recording market substantially, boosts its customer base to 23,000, and enables it to raise its guidance for the immediate future.

With these two acquisitions, NICE has taken on itself the difficult task of assimilating very large companies. However, in both cases it paid a low price. The main reason for that is that both TCS and CRS are active in the voice recording market, which is not considered to be a growth area.

Why then has NICE bought these companies? It seems that the idea is to take innovative technology intended for a growing market and put it in systems for a non-growing market. In other words, NICE has bought companies fairly cheaply, and will turn their products around.

Another point is size advantage. Although the two companies, before they were acquired, operated in a non-growing market, their successful absorption will enable NICE to expand its customer base, and thus revive the market to a certain extent. The most important measure of the success of these acquisitions is therefore the degree to which NICE does indeed manage to put its technology into the systems it has bought with the acquisition of CRS's assets, and thus turn them into products for a growing market.

One of the questions that arises as a result of this acquisition is whether, after NICE expands its market share among rescue organizations, the potential for a merger with Verint Systems (Nasdaq: VRNT) will become greater. Verint has a very large share of the market for listening in to hostile groups, and the two markets are considered complementary.

A further question is whether NICE will shortly sign a collaboration agreement with business intelligence company SAS in order to include in its recording systems the ability to analyze the information they gather.

RBC Capital Markets analysts Daniel Meron says, "The public security market divides into two main parts: the communications interception market, where Verint is dominant, with a market share that we estimate at about 25%, and the rescue forces market, where NICE is currently building up its presence and its dominance. We believe that, as a result of the acquisition, NICE will have 60-70% of this market.

"As is well known, NICE currently sells content analysis systems to the business market. Towards the end of 2005 or at the beginning of 2006, NICE plans to present its content analysis solutions for the security market as well. The CRS acquisition will enable it to leverage these solutions, thanks to CRS's strong presence in this market.

"What’s more, at present 35-40% of CRS's revenue derives from service contracts. This gives NICE good forward visibility. Another important point is that the deal is profitable in the immediate term. Whereas many acquisition deals entail dilution for the shareholders, in this deal, NICE is buying CRS at a sales multiple of about 1 and at a profit multiple of about 11. therefore, this is a good deal both at the level of business expansion and synergy, and at the level of the value of the acquisition to the company."

Published by Globes [online], Israel business news - www.globes.co.il - on April 12, 2005

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