DSET, ISPsoft sign merger agreement

Plagued by weakness in its core interconnection-gateway business, DSET today announced plans to lay off 41% of its staff and merge with software provisioning company ISPsoft, which has only 33 employees, no customers and no revenue.

Funded by Lucent Technologies and Signal Lake Ventures a little more than a year ago, ISPsoft has a suite of software solutions that provision Internet Protocol (IP)-based services for enterprise and service-provider customers. This made the company attractive to William P. McHale, Jr., chairman, president and CEO of DSET, which produces electronic-bonding gateways designed to interconnect operations support systems of competing service providers.

“ISPsoft is bringing a lot to the party in the sense of a set of software solutions to solve the provisioning problem for next-generation services,” McHale said during a conference call with financial analysts this afternoon. “A simple way to look at that is we will focus in the beginning on providing IP-based virtual private networks (VPNs) that support IP security and quality of service.”

To illustrate the potential of next-generation software-based provisioning systems, McHale cited a study by industry research firm IDC indicating this market will grow to about $1.6 billion by 2004 from the current $800 million.

McHale stressed that DSET has no intention of abandoning the gateway market but conceded the company will cut about half the 10 gateways it offers.

With its shares trading at less than $1, DSET considered selling or liquidating the company, but officials decided that both options would leave shareholders with little or no value, McHale said. This made a merger the only viable option.

“If you can’t sell it and can’t liquidate it, you have to do something to grow it, … and we weren’t going to just wait for the gateway market to rebound,” McHale said. “If we just kept going on the gateway path--having $10 million in the bank at the end of the year instead of $5 million and without the ISPsoft products of the future--that wouldn’t get us anywhere.”

As part of the transaction, DSET will issue 9.1 million additional shares that will go to shareholders of ISPsoft, who will hold about 45% of the new company. In addition, DSET will pay $1 million in cash, assume $1.3 million in debt and provide interim funding of $2 million. Provided certain revenue targets are achieved, DSET will pay an additional $1 million in stock or cash in 2002.

DSET announced that it would take a restructuring charge in the second quarter 2001 of $1 million to $1.2 million and would write off as goodwill $5 million to $6 million in intangible assets. In addition, as a cost-saving measure and as a concession to the planned reduction of activity in the gateway market, DSET announced it would reduce its work force by 70 employees.

The new combined company, which will be renamed in September, will have about 133 employees. McHale will continue as chairman and CEO, while Dr. Binay Sugla, ISPsoft’s president and CEO, will become president of the new venture.

The stock market reacted positively to the news, as shares of DSET rose to 92 cents per share, up 42% from yesterday’s close. A year ago, DSET was trading at about $27 per share.