WITH CSG AS ITS NEW OWNER, KENAN HOPES TO REGAIN FOCUS

Lucent sells billing and customer care unit for $300 million

If the industry was seeking confirmation that the end-to-end, pre-integrated OSS model proffered by the major equipment suppliers was just a good experiment gone bad, it came two days before Christmas when Lucent Technologies announced the pending sale of its Kenan Systems to CSG Systems International.

Kenan was a leading supplier of billing and customer care software systems when Lucent acquired it almost three years ago for $1.48 billion. Experts say the company was stifled under the weight of Lucent's management and the discontinuity of its hardware focus.

But the leadership at Denver-based CSG, a billing and customer-care provider specializing in the cable and satellite markets, says the growth potential remains.

“Kenan lost its focus and momentum once it became part of a huge telecom equipment provider,” said Peter Kalan, senior vice president and chief financial officer for CSG. “We believe we can regain the momentum Kenan once had in the wireline and wireless spaces.”

CSG seeks some momentum of its own among traditional telcos, and Kenan will provide “a ton of credibility,” said Scott Donahue, program manager of OSS competitive strategies for Stratecast Partners. Kenan has more than 200 service provider customers, a large portion of which are in Europe, Asia and South America — areas where CSG also could stand more market penetration.

“Kenan has not done poorly in the last year,” Donahue said. “They just haven't done a good job of marketing themselves.” The two companies also agreed that CSG will continue to provide billing and customer care solutions to Lucent's customers.

Although it initially appears that CSG got a bargain-basement price at $300 million — about one-fifth of what Lucent paid for the company three years ago — analysts say Lucent got a fair price. “Last year, it probably would have been considered a steal, but today the market is different,” Donahue said.

Peter Giglio, research analyst for GMK, said it is difficult to correlate the mostly stock-based purchase of Kenan by Lucent with the cash sale to CSG, but “paying 1.5 times annual sales numbers is more in line with what a financial buyer would pay.”

CSG Chairman and CEO Neal Hansen had been waiting for just such an opportunity.

“Patience, discipline, focus and a strong business model enabled us to wait for the right deal, and I believe this is the right deal,” he said. “We did not have to pay six to 10 times revenue [like] other companies have had to pay in recent years for similar transactions.”

Those transactions include Lucent's purchase of Kenan as well as Nortel Network's acquisition of Clarify for $2.1 billion in March 2000 and subsequent sale less than three months ago for $200 million. Donahue cited these two failed experiments as “good case studies for how hardware guys should not do software.”

However, some players are still trying to make the formula work. Equipment maker ADC claims to have signed 20 new customers in 2001 for its Singl.eView customer management and billing solution and garnered contracts with Verizon, Broad-slate Networks and Cablevision Systems for its FastFlow service fulfillment products.

Both solutions are part of ADC's Singularit.e suite of OSS solutions that, like Lucent and Nortel, resulted from major software company acquisitions during a highpoint in the latest economic cycle.

KEEN ON KENAN: FROM ONE OWNER TO THE NEXT

1982
MIT professor Kenan Sahin starts Kenan Systems with $1000 investment

MARCH 1999
Kenan sold to Lucent for $1.48 billion. Sahin becomes Lucent group president

FALL 1999
Sahin makes $100 million donation to MIT

DECEMBER 2000
Sahin exits Lucent

Q1 2002
Anticipated close of sale to CSG (lead by CEO Neal Hansen) for $300 million

Source: Companies