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Sema buys LHS for $4.7B
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March 15, 2000: 1:38 p.m. ET
Shares of billing software firm up 37% on deal with U.K. computer services provider
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NEW YORK (CNNfn) - Computer services company Sema agreed to buy Atlanta-based LHS Group Wednesday, in a $4.7 billion stock deal aimed at boosting Sema's reach into the booming mobile communications and Internet services market.
LHS (LHSG: Research, Estimates) provides software that helps telephone companies figure out how much to bill their customers, but has been among the small-sized players in that market. Sema (SEM), part of the blue-chip FTSE 100 index, is Europe's second-largest provider of services that help companies manage information technology.
The combination will spawn one of the world's largest providers of support services to the telecom industry, offering services from customer billing to messaging and systems integration. LHS will join Sema's existing telecom unit, forming a division with 2,600 employees and $600 million in annual revenue, of which $400 million will come from the cellular market.
One analyst said LHS has needed to bulk up - and the Sema deal will help.
"My take on it is that it solves certain problems for LHS, which has needed to start servicing larger customers," said Michael Turits, an analyst at Prudential Securities. "LHS thrived in the world with smaller wireless companies, and as those began to grow, they have wanted a company that has full service, professional [consulting] services."
Turits said the move amounts to a "rationalization" in the sector, which is gearing up for new high-speed online services such as video conferencing. He said LHS, and its top rivals such as Amdox (DOX: Research, Estimates), Convergys (CBG: Research, Estimates), and Portal Software (PRSF: Research, Estimates), are developing ways to bill such services.
"It still leaves (LHS) several steps behind the leaders," said Turits. He said those leaders have been in "acquisition mode" of late, but are likely to become targets for larger computer services firms like Sema over the long term.
The announcement sent Sema shares tumbling almost 16 percent to 1,422 pence in London, while LSG shares rocketed up 14-3/4, or 37 percent, to 54-3/8 on the Nasdaq stock market shortly after noon ET. Wednesday's drop for Sema cut the company's market value to 7.5 billion pounds ($11.8 billion).
 "Basically, they're overpaying," said Michael Finney, an analyst with Donaldson Lufkin & Jenrette. "Sema has no track record of major acquisitions." He said the market was unhappy Sema was buying "a current technology, not a forward technology."
Sema, which is about one-fifth owned by France Telecom, said it will seek listings for the enlarged company in London, Paris and on the Nasdaq market.
$600M of telecom revenue
DLJ's Finney said the cellular industry is key to the strategy of the software services sector, with all the big players jostling to gain a technological lead.
As part of the transaction, LHS shareholders will receive 2.6 new Sema ordinary shares for each LHS share, valuing each of their existing shares at $69.70. That's 76 percent higher than LHS's closing price of 39-5/8 Tuesday.
LHS investors holding 30 percent of the stock have pledged their shares to Sema. The purchase will give LHS shareholders 27 percent of the enlarged company.
Sema said the deal is expected to add to earnings per share immediately.
LHS last year posted earnings of 65 cents per share - double the previous year's result, when sales rose 61 percent to $262.6 million. Although Sema's sales are more than eight times as big as those of LHS, the U.S. company had a 1999 operating profit margin of 21 percent, making it three times as profitable as Sema for each dollar of revenue.
Wednesday's stock price collapse is an unusual reverse for Sema, which has blazed a trail as one of Britain's leading technology companies. It was one of the first wave of computer-related firms to join the blue-chip FTSE 100 index, and its stock price has doubled over the past six months. 
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Sema Group
LHS
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