A moment before incoming NICE-Systems (Nasdaq: NICE) president and CEO Haim Shani steps in to rescue the company from the plight outgoing chairman and CEO Beni Levin left it in, the company broke the news of its corrected financial reports with a loud crash. With the echoes of its last profit warning still audible in the background, the company announced the layoff of 220 staff as part of a far-reaching restructuring. Battered and bruised, but armed with technology that should not be ignored, NICE is now beginning its redeployment for the market battle.
”Globes”: How do you explain the fact that for an entire year, NICE posted non-existent revenues, while one of the characteristics of large, strong companies is their super-cautious accounting policy?
Shani: ”Please understand that most of the revenues were in fact received by the company. The problem was the timing of their recognition.”
That’s clear, but how do you explain the problem of timing?
”There was pressure on the company to show revenues. Revenues were probably brought forward too aggressively. Perhaps there was an incautious investment in expenses. Even with all the write-offs, however, you can’t ignore the fact that NICE still posted 30% growth between 1999 and 2000.”
What are you doing to prevent a similar situation next year?
”We will set up a stricter control and monitoring system and check expenses more thoroughly, with more clearly defined authorization. Budget targets will be defined more carefully.”
Sources close to Levin said he intended to resign as company chairman two weeks ago, regardless of what was going on. On the other hand, he resigned on the exact day that NICE published the correction in its financial reports. At least from the outside, it looks like someone showed him the door.
”I want to emphasize that Beni Levin is resigning voluntarily. After many years with the company, he decided that it was time to withdraw. As of January 1, when I entered my position, he has transferred the management to me and helped me with advice, at my request.”
One way or another, it appears that after several weeks of examining the feasibility of a merger between NICE and Comverse Infosys, negotiations have come to a halt. Industry sources told “Globes” that the negotiations reached the stage where some of NICE’s employees were already scheduled for training in Comverse Infosys’s technology.
A capital market source claims that if a merger had really been in the works, the change in the financial reports could have at most affected the price. The acquiring company wishes to lower the price, while the acquired company, justifiably, will not agree, since the price of such a deal should reflect future value.
”The problem is that companies like Comverse (Nasdaq: CMVT), for example, are judged solely by the numbers. If it pays a price considered high, taking the reports into account, this is liable to be reflected in the analysts’ surveys, and eventually in the acquiring company’s share price. It seems to me that this is a very good reason for the failure of the negotiations. I very much doubt whether the parties can agree upon a price in these circumstances. At this stage, no matter what price is determined, neither of the two companies can justify it,” the source said (it should be noted that it is not known whether the companies reached the stage of discussing the price).
Is that the end of the story?
”No. In the end, it doesn’t matter which company leads in technology, NICE or Comverse. What is important is that Comverse is a company that acquires technology, while NICE has technology and cash-producing markets. Acquiring NICE would be a step up for Comverse Infosys. That’s why I believe that the acquisition has not been completely removed from the agenda.”
Haim Shani, was there a problem with the price?
Shani: ”I don’t know anything about merger negotiations with Comverse.”
In principle, doesn’t it seem to you that a merger with Comverse Infosys could help both companies?
”No. Mergers can flop, too. Success does not come automatically with a merger. We want to maximize NICE’s value and build it into a winner. A merger of two Israeli companies can succeed, but it can also fail.
”In the past ten years, I have been at both Orbotech (Nasdaq: ORBK) and Applied Materials. I saw for myself what management can accomplish by keeping its head over decades, being patient, building a company for the long term, moving from current to future products, and doing it all the right way. I think that with everything that NICE has done up until now, it has a chance to go all the way. That is my mission now – to succeed in making NICE one of those companies.”
You are ignoring the fact that NICE shares are distributed among a large number of shareholders, who might sell them to a large communications equipment manufacturer. Isn’t it better to merge with Comverse on your terms, while getting a premium?
”A takeover is rare in the high tech industry.”
It may be rare, but it happens.
”I’m not worried. The shareholders are the ones to make a decision like that.”
You have a growth rate of 30%, but the digital voice recording market is growing by 15% a year. How will you manage to grow faster than the market in the long run without a merger?
”The term digital voice recording market is misleading. I think the company’s future lies in the transition to more than just recording services. The moment we enable our customers to better analyze the information accumulated in the interaction between their management and their customers, we allow them to accumulate vital business and marketing data. We are only at the beginning of the road. This is a completely different world from the one in which NICE has operated until now. There is a potential of hundred of millions of dollars over the years. One of our current challenges is to expand our product range, while exploiting our relative advantage.”
Analysts say that the biggest growth is expected in the digital video recording market. Comverse Infosys has gained a big advantage in this market by acquiring Loronix. The combination of your control of the digital voice recording market with their control of the digital video recording market can not only create a large, strong company; it can also save you the effort of grabbing a share of this market.
”The digital video recording market is just beginning. It is true that everyone has the feeling that it’s going to be very big, but our goal is to be number one in this market, too. The fact that someone else got there first doesn’t mean they’ll be there forever. Anyway, as part of our reorganization, we plan to expand our digital video activity in Europe, mainly in Britain.”
By acquiring companies?
”Companies and technologies.”
Is there something in the pipeline?
”No, but we are constantly getting calls.”
How long do you think it will take you to gain control of this market?
”It is hard to commit myself on something like this, but I estimate that we can take the lead within two to three years.”
Again, the question is whether NICE has any chance to survive in the long run without Comverse.
”I think it does, but time will tell. At the moment, we have a clear plan.”
After the layoffs, you still have 880 employees. Will you maintain this number in the long run, or are you planning more layoffs?
”On the contrary, in the long run, we plan to expand, not contract. Meanwhile, I am making every effort to retain our manpower. In any case, we have no plans to lay off more employees than we have already announced.”
What were your criteria for the layoffs?
”We reduced staff in every division, and consolidated in certain areas. For example, NICE has ten US offices. That is a luxury a company of our size cannot permit itself. It resulted from acquisitions and other events in
the past. We prefer fewer and stronger offices.”
What is the scope of the restructuring?
”Up until now, each division was fully responsible for all activity, including sales and service. From now on, each division will be responsible for technology and marketing, while sales and service will be under the responsibility of regional managers. Regional managers will be responsible for selling the products of all company divisions in specific geographical areas. One of the problems of the previous structure was that it was impossible to control sales operations abroad from Israel.”
Up to now you sold NICE products mainly through distributors. Recently, you announced you were planning to sell them yourselves. Aren’t you apprehensive about creating competition vis-a-vis your distributors and undermining their motivation?
”No. We have a hybrid model involving ties with strong distributors, alongside customers preferring to work directly with the company. We’ll maintain this combination in each geographical area, but with some modifications. In recent months, for instance, we expanded direct sales. In any case, we have very clear agreements with distributors, and there are clearly defined areas, so we’re not worried.”
Are you planning to buy more distributors in addition to Stevens Communications?
”We might in the future. It’s not on the agenda at the moment.”
At your video conference with the analysts, you said you were planning to work with subcontractors.
”NICE has a lot of departments, such as the travel department, that aren’t logical to keep. There’s no reason to keep these departments within the company. We told analysts that we were planning to slaughter all our sacred cows, and we meant every word. The heart of the company is its development, marketing and sales divisions, which we’ll keep. As far as other types of activity, such as some manufacturing operations, are concerned, we’re looking into transferring them to subcontractors. One of the advantages in transferring manufacturing to subcontractors is that this would compel the company to standardize its products.
”At the same time, we’re planning to bolster our US subsidiary. We recruited two professional managers. One of them is Avi Shaul, formerly Digital Compaq’s vice president for marketing. We’ve also appointed a service manager for the US, and we’re also planning to open offices in Miami, South America and South East Asia. We’ll soon speed up the move and deploy staff there.”
Published by Israel's Business Arena on February 12, 2001