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An emerging giant; $1.6-billion Alltel and Systematics are positioned for corporate greatness: can they pull it off?

An Emerging Giant

$1.6-Billion Alltel And Systematics Are Positioned For Corporate Greatness: Can They Pull It Off?

In a town not known for keeping secrets, the fact a business deal of such magnitude could be kept under wraps was amazing.

An hour after the markets had closed on Friday, March 2, 1990, Alltel Corp. and Systematics Inc. of Little Rock announced that their boards of directors unanimously had approved an agreement to merge the two companies. It was a decision that shocked Little Rock brokers and business leaders, who had failed to predict the merger.

The details were simple.

Each share of Systematics common stock would be exchanged for 1.325 shares of Alltel common stock. Systematics would be a wholly owned subsidiary of Alltel. Little Rock's Stephens family, which controlled almost 48 percent of Systematics, would become the largest Alltel shareholder.

Although the deal's details were simple, the reasons behind it were not.

Some on Wall Street, in fact, openly questioned the strategy of Alltel, a telephone company that had been an analysts' darling during the late 1980s.

"This is an area on the fringe of where the telecommunications industry is heading," said James J. Stork of Chicago, a securities analyst for Duff & Phelps Inc. "There are really no strategic reasons or synergies."


It is one of those vague business buzzwords that began showing up during the previous decade's rash of buyouts and consolidations.

Following Alltel and Systematics shareholders meetings on May 30, at which time the merger officially was approved, Joe T. Ford of Little Rock, Alltel's president and chief executive officer, attempted to explain the synergy -- combining Alltel's expertise in telecommunications and Systematics' expertise in data processing to go after new business.

"If you look at Cincinnati Bell's annual report, it will tell you that most of the growth in revenue and all of the growth in net income came from information services," Ford told reporters while standing in the Excelsior Hotel lobby. "It is a business the whole industry is looking at."

Yet Ford offered few details of how Alltel's new division would fit into the overall corporate strategy. Alltel's officers never have been known for being talkative around the media for fear of unwittingly revealing plans to competitors in the highly competitive world of telecommunications.

Eight months later, however, it became clear just what Alltel had in mind.

On Nov. 30, 1990, Systematics revealed that it had agreed to acquire C-TEC Corp.'s cellular telephone software system.

At the same time, C-TEC, a Pennsylvania company, agreed to enter into a long-range deal with Systematics under which the Little Rock company would provide virtually all data processing services for C-TEC's telephone, cable television and cellular operations.

Now with analyst's singing the praises of the Systematics Alltel merger and the announcement of Alltel's new $6.5-million new office building, a new corporate giant is emerging in Little Rock (now firmly an Arkansas company with the retirement of Alltel Chairman Weldon W. Case).

A company that combines the business savvy of the Stephens family with its expanding financial services empire; top-notch CEOs Ford of Alltel and John E. Steuri of Systematics; and a telecommunications industry that seems boundless.

That's just the kind of mix that has made Stephens Inc. one of the largest brokerage firms off Wall Street. Will it help make Alltel one of the nation's telecommunications leaders over the next decade?

Intentions Clear

With the C-TEC contract, suddenly Systematics, which for 22 years has based its business on providing data processing services for and leasing software to financial institutions, was entering a new and potentially lucrative field.

Thus far, Systematics has signed data processing contracts with only two telephone companies -- C-TEC and Alltel, its parent firm.

But there are about 1,300 other telephone companies out there that Systematics can approach with the same pitch it has used when recruiting banks and savings and loan institutions: "Let us do your data processing for you. We can do it cheaper and more efficiently than you can do it in-house."

In the business, it's known as outsourcing.

"There were a lot of people out there who didn't understand how Systematics fit," admits Ronald D. Payne, Alltel's vice president for investor relations. "But the C-TEC opportunity presented itself, and there are going to be more opportunities as time goes on.

"We didn't try to spell out our reasons for merging with Alltel to those who disagreed with the decision. We still don't. In the financial community, though, there has been an enormous turnaround in attitudes. People realize that we are moving into new areas faster than anyone felt possible."

Prior to November's C-TEC announcement, Stork still had doubts.

"We do not view this as a strategic acquisition," the analyst wrote in an otherwise glowing September report on Alltel. "Although data processing and telecommunications may be converging, it is difficult to see how the combination of these two companies will result in much in the way of synergy over the next five years. We get the impression that Alltel acquired Systematics simply because it became available, and Alltel felt it could increase its consolidated growth potential for a reasonable price."

Has Stork changed his tune?


"They made the right move with the C-TEC acquisition," he now says. "I feel very positive about the long-term growth opportunities."

So do others.

Positive Reports

Positive reports from securities analysts nationwide seem to flow into the Alltel and Systematics headquarters on a daily basis.

Part of the bullishness stems from the high regard analysts have for the software -- the brand name for which is Virtuoso -- Systematics purchased from C-TEC for $12 million, along with royalties of at least $3.6 million on licensing fees.

Virtuoso, which operates on both IBM's AS/400 and larger mainframes, is a complete cellular information system that includes what is described as a state-of-the-art billing mechanism. The purchase was a perfect fit since Systematics software works only on IBM hardware.

Systematics hopes to provide the software to other cellular carriers and expand the company's comprehensive data processing services into the back offices of the entire telephone industry.

If there is a danger for Systematics at this point, it is in trying to become too big, too fast.

"It's true that you must control growth to maintain quality," says Steuri, Systematics' chairman and chief executive officer who joined the company in October 1988 following a 24-year career with IBM. "There have been occasions when our sales reps have been sent home for a week or two so we wouldn't sign more contracts than we could service."

Steuri says the company will move slowly into the field of servicing telephone companies.

"I wouldn't describe us as aggressive at this point," he says.

There's no doubt, however, that those at the top of the Alltel corporate structure expect the endeavor eventually to pay huge dividends.

In a report dated Jan. 11, Dathan A. Gaskill of Stephens Inc. predicted the purchase of Virtuoso software would "provide significant growth opportunities for Alltel's information services business. This software acquisition and the facilities management contract put the merger of Alltel and Systematics into perspective.

"While the C-TEC deal will have little impact on Alltel's earnings in fiscal 1991, we think the potential for additional telecommunications facilities management business and cellular software sales merits some premium as information services momentum builds from here."

Gaskill expects annual revenues from the management contract with C-TEC to range from $8 million to $12 million with pretax margins of 25 percent or better.

Gaskill and other analysts understand there are two opportunities for Systematics to utilize what will be known as its Telecommunications Services Division.

First, the company can sell the Virtuoso software. Second, it can handle data processing functions for telephone companies through outsourcing agreements. In addition to billing, Virtuoso performs sales lead management, account processing, equipment tracking and credit and collection functions.

"Alltel should be able to capitalize on industrywide cellular growth trends toward outsourcing as a cost-effective way to do business and the expected emphasis on cost cutting driven by price-cap regulation," Gaskill writes. "We are stressing Alltel's long-term growth potential for leveraging its combined telecommunications and data processing expertise into cellular and telecommunications facilities management and software sales."

Automatic Advantage

An automatic advantage is that the telecommunications industry already is a major user of IBM hardware.

"Having Systematics' IBM platform and a successful IBM-based data processing track record augurs well for building facilities management services and selling software into a new area," Gaskill says.

Systematics' primary competitor will be the company Ford mentioned -- Cincinnati Bell. Almost 70 percent of the market for cellular information systems belongs to Cincinnati Bell.

The stir created by Systematics' decision to handle data processing for telecommunications firms doesn't mean the company is ignoring its bread and butter -- financial institutions. Far from it.

Many analysts expect at least 15 percent growth in Systematics' traditional business of providing data processing services to financial institutions.

"More and more banks and savings and loans consider outsourcing a viable alternative," Steuri says. "Our biggest competitors continue to be the in-house operations."

Along with the C-TEC deal, Systematics made three acquisitions following the merger with Alltel:

* In May 1990, Systematics said it planned to acquire Horizon Financial Software Corp. of Orlando, Fla., and merge it with the company's Mid-Range Systems Division.

That division was established in September 1989 to create software programs for smaller financial institutions with assets of $100 million to $400 million. In essence, Systematics bought out its new division's chief competitor.

Following the Horizon purchase, the 40 Little Rock-based Mid-Range Systems Division employees were transferred to other divisions. Some grumbled publicly, but it did not slow Systematics' acquisition binge.

* In October 1990, Systematics bought Computer Dynamics Inc. of Little Rock, a 20-employee mortgage data processor servicing 200,000 loans for financial institutions in six states. CDI became the company's Mortgage Banking Services Division, and Ronald D. McKenzie continued to head the operation.

* In February, Systematics acquired Systems Limited of Hong Kong, a banking software firm for banks involved in worldwide financial activities such as import-export documentation.

"I can assure you I didn't have time to duck hunt last year," Steuri says. "On Dec. 1, we had 3,500 employees. By April 1, we had 4,500 employees. We will continue to look for acquisitions that fit into our corporate strategy, but I don't think you'll see us making four major acquisitions in less than a year again. We want to focus on our core businesses."

Company Growth

Systematics' revenue has grown from:

* $130,628,000 in 1986;

* $163,151,000 in 1987;

* $196,929,000 in 1988;

* $223,960,000 in 1989;

* $254,805,000 in 1990.

Earnings have followed a similar path, going from:

* $16,626,000 in 1986;

* $19,740,000 in 1987;

* $27,641,000 in 1988;

* $31,963,000 in 1989

* $34,159,000 in 1990.

The company's committed revenue from long-term contracts -- known as its backlog -- has grown from;

* $351,602,000 in 1986;

* $409,027,000 in 1987;

* $491,820,000 in 1988;

* $508,730,000 in 1989;

* $730,706,000 in 1990.

Last month, the backlog topped $1 billion.

About 84 percent of the company's 1990 revenue came from long-term facilities management agreements, including the two biggest contracts in Systematics' history -- a 10-year contract with City National Bank of Beverly Hills, Calif., said to be worth somewhere between $350 million and $500 million, and a 10-year contract with the $5-billion Team Bank of Texas.

Michael A. Morache, Systematics' vice president for marketing, says City National was faced with a large capital investment to upgrade its software.

"We all know that in the banking industry today, capital is scarce, and they looked around for someone like us," Morache says.

Because of the capital shortage, domestic software sales were soft, but Systematics met its 12-month goal for facilities management contracts in the first nine months of the 1990 fiscal year.

"Everyone knows there is a general malaise in the financial sector," Steuri says. "Granted, that hurts our software sales, which accounted for only 10-12 percent of our business last year.

"There's another side, though. A downturn creates tremendous pressure on banks and savings and loans to get their capital base up and their cost of doing business down. If they turn their data processing over to us, we can help them in both areas. We can reduce their costs at least 10 percent to 15 percent and put money on their bottom line real fast."

The Salesman

Steuri sounds very much like the salesman he has always been. He began work at IBM as a sales representative in Topeka, Kan., in 1964. Twenty-four years later, he directed an IBM field marketing force of 9,000 people responsible for more than $6 billion in annual revenues.

Steuri says he always had planned to leave IBM at age 55 after 30 years of service and begin a second career. But IBM, cutting back its massive work force of more than 400,000 people, offered an attractive early-out package. Steuri thus decided to depart in 1988 at age 49, six years ahead of schedule.

He first thought about forming his own business. He also put out feelers to other companies. One of those feelers went to Systematics.

"For starters, I wanted to get back to this part of the country," says Steuri, who was living in Connecticut when he left IBM. "The qualities I admired in IBM were evident at Systematics. It was a well-run, focused, growth-oriented company with a commitment to customer service. Walter Smiley and most of its early officers had begun their careers at IBM. Systematics also was still small enough that I felt I had a chance to be part of a real entrepreneurial enterprise."

On a 1988 visit to Little Rock, Steuri was impressed with Jack Stephens, Systematics' largest stockholder. He calls Stephens "a businessman with vision who is committed to backing that vision. Jack Stephens and Jon Jacoby (Stephens Inc.'s executive vice president and chief financial officer) are long-haul players. They built a magnificent base from which to launch the next 20 years."

Another long-haul player is Alltel's Ford. It was Ford who invited Steuri to lunch in February 1990 and proposed the merger. With input from Stephens and Jacoby, the deal fell into place in a matter of weeks.

Ford says Systematics fit perfectly into Alltel's strategy of adding non-regulated companies that can grow at a faster rate than the regulated telephone business, a mature industry with little growth. He also admits that Systematics' earnings growth was attractive with revenues and income having increased during the five years preceding the merger at compound annual rates of 17.7 percent and 17.6 percent, respectively.

"I am confident we can continue to sustain a double-digit growth rate for the foreseeable future," Steuri says.

Alltel paid almost $500 million in shares for Systematics. The impact on Alltel's 1990 net income was dilutive, but observers expect the company to grow through the dilution quickly and achieve faster earnings growth because of the merger.

And what about synergy?

Steuri says that as part of the contract with Team Bank of Texas, Alltel employees are assisting on a telecommunications project.

"There is obvious synergy since the computer networks are communication intensive and Alltel, as a phone company, has experienced personnel in this area," says Joel D. Gross of New York, vice president of Donaldson, Lufkin & Jenrette Securities Corp.

That is not to mention the acquisition of the Virtuoso telephone billing and information system software.

With Alltel's telephone operations growing at a slower rate than in previous quarters due to the recession, investors are counting on Systematics to fuel much of the company's future growth.

Steuri, whose contract runs until the year 2004, appears ready to live up to those expectations. He has earned the confidence of Alltel's biggest investor, Stephens, and its CEO, Ford.

Payne, the Alltel vice president, concludes that the Alltel-Systematics marriage is "working just the way it was planned. We couldn't be happier."

PHOTO : LOOKING TO THE FUTURE: John E. Steuri replaced Walter V. Smiley in October 1988 as chief executive officer of Systematics. Steuri, who directed a field marketing force of more than 9,000 people when he was at IBM, took over as chairman from Smiley the following year. Since the company's 1990 merger with Alltel Corp., Steuri has engineered a series of four acquisitions to position Systematics for the 1990s.
COPYRIGHT 1991 Journal Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:includes history of Systematics Inc.; merger of Alltel Corp. and Systematics Inc.
Author:Nelson, Rex
Publication:Arkansas Business
Article Type:Cover Story
Date:Apr 8, 1991
Previous Article:Million dollar marketing move.
Next Article:Blue Cross leads the field again.

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