U.K.-based Sema Group, the second-largest computer services firm in Europe, recently formed its own unit to provide services to the telecommunications market and hopes the buy will allow it to tap the expected mobile communications boom.
Atlanta-based LHS Group provides billing and support software to the communications industry. The company's software helps match phone calls or Internet login sessions to a customer's records in order to automatically produce a bill.
The news of the deal sent shares of LHS Group soaring 35 percent. In morning trading, LHS shares jumped $13.87 to $53.50.
The two companies hope the merger of Sema's telecom business with LHS will create one of the largest providers of customer care, billing and messaging software and services for the wireless telecom sector.
"(This is) a good match in the sense that it's positive for LHS, who has had a strong wireless off-the-shelf product but has been unable to target larger customers," said Michael Turtis, an analyst at Prudential Securities.
In recent months, the lucrative market for wireless products and software has spurred major attention from a growing list of technology providers.
According to a recent Yankee Group study, the number of digital wireless phone users will grow from 220 million in 1998 to roughly 1 billion over the next four years. Anticipating that explosion, handheld device makers, software companies, and e-commerce and Internet access players are aggressively bolstering their efforts to target the space by either forming their own separate wireless communications units or delivering Net services and content to handheld devices.
LHS has been lacking a professional services organization and needed one to really target the larger telecom firms, said Turtis, who currently has a "hold" rating on the company's stock. Despite that positive angle, Turtis said that "the combined group is still at a disadvantage against (giant competitor) Amdocs who has been doing combined wireless and wireline installations for a number of years."
Turtis added that Amdocs, which provides both telecom billing software and professional services, will be the combined company's strongest competitor in the wireless and telecommunications segment. While Sema does currently serve the telecom market, the greater part of its business falls among other businesses and government contracts.
"Sema is a broader IT services company, which is another disadvantage," Turtis said.
Under terms of the deal, LHS said its shareholders will receive 2.6 new Sema ordinary shares for each LHS common share held at closing. Based on LHS' closing price yesterday of $39.63, the merger terms currently represent a value of $69.70 per LHS share and values the deal at $4.7 billion. Following the merger, Sema shareholders will own about 73 percent of the combined company and LHS shareholders will own 27 percent.
The combined operation will have more than 2,600 employees, 350 customer centers, 140 million subscribers and $400 million in revenues, the companies said.
Sema, which has an employee base of about 20,200, competes with Cap Gemini and larger, U.S.-based firms like EDS and CSC. It said it expects the merger to boost business in its core offerings as well, such as systems integration work, outsourcing and messaging.
When the deal closes, LHS chairman and founder Hartmut Lademacher and LHS director George Schmitt will join Sema's board as non-executive directors. General Atlantic Partners, a major shareholder of LHS, has voted in favor of the deal. Sema said it will have full authority to manage the business of LHS upon closing of the deal.
The deal, which is subject to shareholder approval and regulatory closing conditions, is expected to close in the second half of 2000.