Ericsson acquires LHS

Ovum/Jean-Charles Doineau
05 Jun 2007

Ericsson has announced a cash offer for LHS valuing the billing software vendor at $310 million. This represents a premium of about 33% on the last trading value of LHS shares.

Ovum practice leader Jean-Charles Doineaucomments:

The billing market is a very specific telecoms software market, and the story of LHS is a very good example of this. A few years ago, LHS faced financial difficulties and at the time everyone in the industry thought the company would disappear, one way or another. But LHS survived, building upon a continuous effort to develop additional revenue streams on its own installed base.

But service provider consolidation and pressure on costs has in turn put pressure on billing vendors, pushing them into developing different strategies and alliances. There are only two obvious paths for them to take. The first path follows an IT route, which is efficient in mature markets where the IT service provider domain is the strongest. It consists of building a 'universal telco IT back end' on the billing area through the development of additional software features. This is what Amdocs has been pursuing through the recent acquisition of Cramer in the OSS domain, the alignment of billing with CRM, and the newly announced service creation features. The opposite of this strategy is the option that creates a deeper link between the billing capabilities and the network environment, developing a 'convergent charging' area. This strategy relies on a deeper realtime traffic control capability, and consequently on a tighter integration with network capabilities. It is also best suited to carriers in emerging markets, where service providers have a much lower tendency to deploy IT solutions.

LHS's installed based and strategy has always been impressive in the tier 2 and tier 3 markets, and in the emerging markets. Most of its installed base is in these regions, which will move towards a convergent charging approach. This is why this acquisition makes sense for Ericsson, as LHS's approach will fit nicely in Ericsson's delivery capabilities and prepaid-led billing strategy.

Overall, we believe this acquisition is a pretty smart move for Ericsson and for LHS - and probably marks the end of a story that has had many ups and downs for the German billing software vendor. This acquisition also re-shuffles the deck of cards in the entire billing market, as LHS used to be one of the companies that was more open to partnerships with IT integrators and network equipments providers. In that sense, this acquisition could push some of LHS's partners to re-consider their billing strategy, potentially opening the door to another round of consolidation in the market.

Jean-Charles leads Ovum's Service Infrastructure research practice, which focuses on the applications market that enables service provisioning in the telecoms space.

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