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Ness Technologies bought by Citi unit for $307m

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Friday, June 24th, 2011

As reported in Globes:

IT services and solutions company Ness Technologies Ltd. (Nasdaq: NSTC; TASE: NSTC) announced on Friday that Citigroup Inc. (NYSE: C) unit Citi Venture Capital International (CVCI) will acquire the company for $307 million in cash.

CVCI will pay $7.75 per share for Ness, 17.6% over the company’s closing price on Nasdaq on Thursday.

Ness’s board of directors recommended that the shareholders approve the deal.

Ness CEO Sachi Gerlitz described the acquisition as a new beginning said that he believed the company would continue to operate. He told “Globes”, “In my opinion in another four years the company could be in line for a renewed public offering.”

Gerlitz was appointed CEO in 2007, when the company’s market cap was close to a record $600 million, but the company has gone through hard times since then. The global economic crisis hit the company hard, as many of the company’s were US financial institutions that were battered by the crisis. Ness’s share price tanked, and the improvement in the company’s 2010 results did not help much.

One reason for the stagnation is the wide range of operations by the 7,000-man company, which the capital market does not care for. In Israel, where Ness began 13 years ago, the company is back on its feet. However, the company’s Central European operations have been hard hit due to the recession there in the past two years, and the performance by company’s US operations have been poor in the past year, forcing major restructuring in the first quarter of 2011.

Gerlitz does not know if he will stay on at Ness following the closing. As for the future, he says, “The company will exploit the coming years to grow its profits in Israel, develop is North American operations, and want for the economic conditions in Northern and Central Europe to improve. They will improve, but it will take more time, and then we’ll be in an excellent position. Citi is buying us because they believe in this path. In no other way will be able to achieve the returns that a private equity fund wants for itself.”

Gerlitz believes that it is better for Ness to be a private company while it waits for the market to improve. “It’s a lot harder to get through these times as a public company, because the board of directors ultimately looks at the share price and is pressured,” he says. “As a services company in a business with low margins, that is hard and works slowly. It’s easier to be a private company because you think in the long term and not about the share price in the market every day.

Gerlitz believes that CVCI will not change Ness’s world even though it is tempting to think that the acquisition marks the end of Ness as a consolidated company of its current operations; in particular the severing of Ness Israel from the company’s other operations. “I believe that what was, will be, with the same management and strategy,” says Gerlitz. “My explanation is that this isn’t someone from outside coming in with big new ideas. This is a fund that has been an investor in the company for over two years, and they have directors on our board. They understand the business, so why change what exists now?”

“Globes”: Could the sale of some operations be more practical for them than for you as the CEO of a public company?

Gerlitz: “If I thought that the value of the company was small than the value of its parts, I’d do that. Other people may understand better than me, but that’s not a foreign concept to me.”

Gerlitz believes that severing Ness Israel from the company’s other operations would make it difficult to sell the operations and also create problems with Ness’s original tax structure, which he says is not suitable for breaking up the company. There are also financial and operational considerations against a breakup. “I think that the synergy between the US, Israel, and Europe has demonstrated its competitive advantage,” he concludes.

Ness’s share price rose 1.4% on Friday on Nasdaq to $6.68, giving a market cap of $255 million, and rose 13.6% in early trading on the TASE today to NIS 24.94.

Published by Globes [online], Israel business news – www.globes-online.com – on June 12, 2011