The end is near.
That is the prophecy heralded by the principals of Phone.com Inc. and Software.com Inc., which last week said they will merge in what is the largest announced wireless Internet transaction to date.
“Together, we are going to be an incredible force,” said John MacFarlane, chief executive officer of Software.com. “There are very few opportunities in life to create a company that in one instance forever changes the rules of the game, and this is one of those rare occasions.”
The new company aims to dismantle the legacy systems used today to house services like voice mail, unified messaging and e-mail. The combined company’s goal is to offer software infrastructure and applications allowing the delivery of e-mail, voice mail, unified messaging, directory services and wireless Internet access from one Internet-based platform to any type of IP network-whether wireless, wireline, cable or broadband.
“The biggest vision of this merger is that the wireless and wireline worlds are changing in the sense of services offered on both,” said Ben Linder, vice president of marketing at Phone.com. “This is the beginning of the phase where the old dinosaurs are kicked out by open and standards-based systems.”
Phone.com makes wireless Internet infrastructure software, providing both the server and client technology necessary to access the Internet wirelessly, as well as a number of additional applications. Software.com provides wireline Internet messaging infrastructure. Together, they plan to provide carrier-class software infrastructure that allows operators to have one voice mailbox for wireless and wireline networks and one in-box for all e-mail services.
“It’s a deconstruction of the legacy infrastructure, which I call the refrigerator phenomenon,” Linder continued. “You buy a big refrigerator for voice mail, another for unified messaging, another for e-mail. Those are all big proprietary boxes. Internet technology has deconstructed this into standards-based parts. Doing voice mail in the Internet age is not about being on a big refrigerator, but digitizing it and storing it on standards-based computers.”
Both companies have spent the last several years defining this space, Phone.com on the wireless side and Software.com in wireline. The merger reflects the growing convergence between the two fields.
“Both companies began in the `plumbing’ layer, putting the basic layer of infrastructure in place,” Linder said. “For us, it was WAP. For Software.com, it was messaging. That’s the lowest layer. The progression for Phone.com was to come into the application space. We got past the basic enablement, then we asked ourselves how we could employ our expertise to build compelling applications.”
The company began with the MyPhone portal service, then added unified messaging through its acquisition of Onebox.com. Next came voice-recognition and location-based technologies and applications.
“Our acquisition of Onebox.com was where the relationship with Software.com began,” he said. Onebox.com used Software.com’s InterMail messaging server.
The companies soon became aware of a growing need for the other’s expertise.
“The carriers want to combine their methods of access, whether it’s coming in from wireline or wireless,” MacFarlane said. “They really needed a combined viewpoint from both companies.”
“Their products are very relevant in the wireless market,” Linder explained. “E-mail is very important to wireless carriers, and a host of their customers have both wireline and wireless, like British Telecom. We can sell them the wireless software more easily.”
Wall Street universally praised the merger, as Phone.com stock closed up $13.06 at $91.12 after the merger announcement, while Software.com’s stock skyrocketed $34.68 on the news to close at $142.43.
“This is the first strong reaction by the market to a merger like this for a long time. It’s the first one that’s been received so well,” said Marianne Wolk, an analyst at Robertson Stephens & Co. “We think this makes a lot of strategic sense for a number of reasons.”
Under the terms of the agreement, Software.com and Phone.com shareholders each will own half of the combined company. Through a pooling of interests, each Software.com shareholder will receive 1.61 Phone.com shares for each share of Software.com common stock they own. The transaction, valued at about $6.4 billion, is expected to close by the end of the year.
The new company will have its headquarters at Phone.com’s home base in Redwood, Calif. A new company name will be announced later.
Phone.com has a market capitalization of $6.3 billion, and Software.com has a market capitalization of $5.9 billion. Each company brings more than $500 million in cash and just as much in annual revenues to the table.
In addition, the companies only share eight customers.
“For Phone.com, this really diversifies its customer base,” Wolk said. “Prior to this, they sold to wireless carriers only. With Software.com, they now can sell to Internet service providers, application service providers and wireline carriers, as well as portals like Excite@Home.”
The merger also gives both companies a stronger global presence.
“Geographically, they are distributed like we are,” Linder said, “but the majority of their revenue comes from within the United States, while the majority of our revenue comes from outside the U.S.”
Don Listwin, once considered the heir apparent to run Cisco Systems, will lead the new company. Listwin, the first of only two executive vice presidents at Cisco, will be president and CEO of the new firm. He also sits on Software.com’s board of directors.
“Don is an amazing force to drive this company to immense growth,” Linder said. “First, he built Cisco’s carrier business into an $8 billion business. He was responsible for integrating 70 of their acquisitions. … So you have an incredibly smart and capable guy who started with Cisco when they were smaller than us and helped it grow to one of the most valuable companies in the world.”
Besides his management skills, Listwin also is expected to maintain a close relationship with Cisco, which Listwin expects to be a strong partner of the new company.
“Our real goal is to see whether or not the combined company can work with Cisco in the complementary nature of Cisco’s Internet systems with the new software platform that we’re jointly creating,” he said. “Cisco is nascent in the wireless area and would want to work closely there with the new company.”
Cisco has current investments in Software.com that will translate into 3-percent ownership in the combined company once the merger is complete.
In addition, Phone.com Chairman and CEO Alain Rossmann will become executive vice president and chairman of the new firm, while Software.com CEO MacFarlane will serve as executive vice president.
The aftershock of this merger is expected to act as a catalyst for others competing in the wireless Internet space to join forces.
“This really widens the gap between the smaller competitors targeting wireless carriers with more niche solutions,” Wolk said.
Firms like InfoSpace Inc., Comverse and Critical Path offer similar messaging, e-mail and Internet platform solutions, while others such as Nokia Corp. and L.M. Ericsson compete in WAP solutions.
“Anytime a company redefines a market, you’ll find they don’t have many competitors with their whole range of services, but only those with different parts,” Linder said.
