Wednesday, January 23, 2013

Why a Deal Between Verint and Nice Systems Makes Sense

According to a Reuters article, Israeli data and security company Nice Systems (NASDAQ: NICE) is in talks to buy its smaller rival and compatriot Verint Systems (NASDAQ: VRNT). As ever with these sorts of situations, Nice declined to comment on the initial speculation. However, the market seems convinced and suitably marked both stocks up in sympathy. So where next for the two stocks, and would a combined entity be a good deal?

Old Questions, Old Answers

A fitting subheading, because I did what I always do in these situations. For the record I closed a long position in Nice Systems on the day because of a long standing position of always closing positions during this sort of speculative activity. It’s a rule of mine created to avoid possibly trading against people better informed than I am on corporate situations.

That said, I happen to think that –if true- the deal is an obvious one and makes perfect sense. I like both companies and think they are undervalued. Naturally this means that I think Verint would come at a good price for Nice, provided the premium isn’t too excessive.  I last discussed Nice Systems in this article and Verint in this article. Essentially their kinds of work flow optimization solutions are a kind of back door way to play the big data story, but without the sky high evaluations or seeing the big data idea lost within a small part of a much larger companies operations.

The idea is that if multi-platform customer interactions are only going to increase in time than customer interaction monitoring and management are going to grow alongside them. Moreover as companies have more interactions and a greater awareness is created of the return on investment generated by big data analytics than more companies will opt to invest in them.

Why a Deal Would Make Sense

Nice’s strength is in the corporate sector, where it has a strong presence within verticals such as financials and call centers whereas Verint has more Government exposure. Indeed Verint has a larger share of business coming from security issues like monitoring and fighting cyber crime both internally and externally. Whereas Nice’s analytics deal with IBM (NYSE: IBM) indicates that the analytics of the data that its hardware generates are going to be a key driver for the company. The recent extension of this deal will allow Nice to fully leverage its customer base and aid IBM’s intention to dominate the big data analytics space. I’ve always felt that IBM is a potential acquirer of Nice, but if the Verint deal is on then this might have to wait a while.

Security revenues tend to be a bit lumpy with Nice, so merging with Verint would smooth out earnings, particularly as Nice is stronger in analytics. Throw in the potential synergies generated by two companies from the same country merging, and it all works well. It also makes sense from a valuation perspective with Verint trading on an EV/EBITDA multiple of 11.3x, while Nice is on 13.9x. In addition Nice has $422 million in cash on its balance sheet and Verint has (on a trailing basis) generated $111 million in free cash flow. So for the current enterprise value of $1.66 billion Nice gets around, say, $100 million (6%) back in free cash flow in a year plus associated cost savings. It also gets complimentary end markets and the opportunity to sell each others’ solutions to their respective customer bases.

In fact the only major negative could be some competitive concerns and the worry that it could be overpaying for a company that is about to disappoint the market.

Where Next For Verint & Nice?

Both companies have had to downgrade their summer expectations and then have seen things stabilize in the autumn. Although their end market drivers are driven by things like regulatory compliance requirements, they are also exposed to capital spending requirements of their customers. If clients are adopting a ‘wait and see’ approach to investing in customer interaction monitoring due to political considerations, then it will feed through into their results.

A potential deal would make sense to me and I would be attracted back in if it happens. In the long run one of these companies will attract a potential buyer, and perhaps even more so if they are combined. If a software company wants to sell big data analytics it makes sense to own the hardware companies that already have an installed base amongst much of the potential client base.