Possible Catalysts For This Spinoff

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In August of 2012, New York-based billing services and data management firm Comverse Technology (CMVT – defunct) spun off its telecommunications division and agreed to be purchased by Melville, New York-based Verint Systems (NASDAQ: VRNT). Known as Comverse Incorporated (NASDAQ:CNSI), the spun-off company began trading in late 2012. Valued at about $800 million, the all-stock acquisition portion of the deal officially closed on February 4, 2013.

The spin-off portion of the deal closed in October of 2012. Since then, Comverse Incorporated has traded within a relatively tight range and exhibited little definitive movement. Relative to the broader market, its performance has been mediocre at best.

About Comverse Technology, Comverse Incorporated and Verint Systems

Comverse Technology was a data management and business billing firm that provided a wide range of services to telecommunications businesses. The company operated and ran a proprietary system that enabled its business clients to bill, contact and interact with their customers in an efficient, seamless manner. Comverse also delivered a wide range of value-added services, including IP messaging, multimedia integration, call-completion solutions and SMS support. The company struggled to keep up with its competitors and faced a serious accounting scandal that dramatically undermined its credibility during the early 2010s.

Comverse Incorporated is the spun-off telecommunications division of Comverse Technology. The company offers many of the same services as its former parent. In fact, it is comprised primarily of the value-producing segments of the formerly-independent billing and telecommunications firm. Its primary services include ONE Billing and the Netcentrex Internet Protocol. The company employs about 2,600 employees and earned about $46.8 million on revenues of around $675 million in 2012.

Verint Systems is a technology and telecommunications company that provides a number of services for business clients on a global basis. It derives most of its business from value-added services like voice recognition and text-crawling. Many of the company’s clients rely on Verint to provide so-called “actionable intelligence” that can provide them with a leg up on their competitors. It markets its services under multiple brand names, including Nextiva, Stargate and Cybervision. In 2012, Verint’s EBITDA totaled $147.1 million on gross revenue of $822.57 million.

How the Deal Was Structured

Under the terms of the spin-off, Comverse Technology parted with all of its profitable assets and ceased to exist as a publicly-traded entity. Each Comverse Technology shareholder received one share of the newly spun-off company for every 10 shares that they owned.

Meanwhile, the merger portion of the spin-off provided qualifying Comverse Technology shareholders with about 1.3 Verint shares for every 10 shares of Comverse that they owned. Relative to Verint’s February 4 closing price, this valued each Comverse share at approximately $4.41. A total of more than 27 million shares were involved in this transaction. Once both transactions had been completed, former Comverse Technology shareholders owned stakes in both Verint and Comverse Incorporated.

Post-Deal Performance

Since the completion of the spin-off, Comverse Incorporated’s performance has been middling. The company began trading on November 1, 2012 at $28 per share and reached a closing high of $31.44 on November 6. By November 14, the stock had reached a closing low of $26.95 per share. Since then, it has traded within a narrow range between these two extremes and remains more or less directionless. It closed at $28.04 on February 15, 2013 and has produced only a negligible return since its debut. During the same time frame, the S&P 500 rose by about 5 percent. As such, Comverse has under-performed the broader market by about this amount.

By contrast, shares of Verint Systems have outperformed the broader market since the spin-off. On November 1, 2012, Verint closed at around $27 per share. It has since risen along a nearly unbroken trajectory to close near $34.31 per share on February 15. This equates to a post-deal return of roughly 27 percent. In other words, Verint has outperformed the broader market by around 22 percent since the spin-off.

Long-Term Prospects and Outlook

Comverse Incorporated’s prospects remain uncertain. While it works with a number of dynamic, fast-growing businesses and should be expanding its customer base, its revenues have been weak. Initially, there was some speculation that a weakened Comverse Technology might become a takeover target for a major Web 2.0 firm like Facebook (NASDAQ: FB).  Facebook has $10 billion in cash and likely could receive financing too.  However, Facebook has other problems to solve first such as their losses in a few of the past quarters.

Although the spin-off has quieted these rumors for the time being, it appears likely that they will resurface in the near future. Facebook and some of its larger peers would certainly benefit from integrating a full-service value-added company into their corporate ecosystems. Alternatively, payment systems providers like Visa might also be able to make use of Comverse Incorporated’s telecommunications services assets.

Given its strong customer base of growing technology and telecommunications firms, Comverse offers a long-term arbitrage opportunity for experienced investors. Alternatively, the company might remain independent for years and find a foothold as a competitive entity. In either case, it bears watching at its current share-price levels.

mthiessen has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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