June 29, 1998, TechWeb News
Understanding The Far-Reaching
Ramifications Of Merger Mania
By John T. Mulqueen
Do you have $140 billion? If so, you may be
able to buy Cisco. That's what analysts say the
king of internetworking would cost. Cisco's
market value already exceeds $87 billion, and
with an annual growth rate of more than 35
percent, you'll have to shell out big bucks if
you want it.
If Cisco doesn't catch your fancy, your $140
billion can still go a long way. You can buy
Ameritech for $62 billion, MCI for $38 billion
and SNET Corp. for $4 billion. You'll still have
enough left over to buy Ascend
Communications Inc. for maybe $14 billion,
Cabletron for $4 billion, Fore Systems for
perhaps $4 billion, Newbridge Networks Inc. for
a cool $6 billion and Xylan Corp. for, let's say,
$2 billion.
There's no disputing that Cisco is a great
company. It has accomplished something no
other company in the history of data
networking has done-grown rapidly over a
10-year period. It has bought a grab bag of
companies and integrated them successfully
into its operations, and those it acquired that
didn't make it haven't hurt it. And Cisco's major
acquisition of StrataCom Inc. has helped it
enter new markets. Cisco has won some major
contracts for StrataCom's frame relay and ATM
switches from telecommunications carriers. At
the same time, Cisco is managing the
slowdown of its core router business.
But the idea that Cisco is worth more than
several telephone companies and almost all of
its traditional competitors combined is patently
absurd. It's not Cisco's fault. Investors are
irrational, plain and simple. Analysts complain
that money managers will pay any price for a
stock in the belief that growth will last forever.
That's what is driving Cisco's share price up,
along with the idea that the networking
industry is coalescing around a few big players
and that Cisco will be one of the winners.
Two weeks ago, Northern Telecom announced
its $9 billion bid for Bay Networks, Ericsson
Inc. was supposed to be ready to buy Ascend,
then it seemed Lucent Technologies Inc. might
buy everybody in a few months.
"What data networking industry? There won't
be one next year," one analyst said.
He pointed to some interesting statistics. So
far in 1998 there have been 19 acquisitions of
communications equipment vendors, valued at
$22.7 billion. In 1997, 34 deals were made,
valued at $15.8 billion. In 1996, acquirers spent
$9.1 billion in 41 transactions.
The dynamics of the market mean that Lucent,
Nortel and Cisco are going to dominate the
networking arena. All three will sell carrier and
enterprise networking devices. Cisco's
specialty is data; the other two, voice. Nortel
turned to Bay for data and Lucent is "stringing
pearls" with purchases of small data
networking companies. Cisco has admitted it
wanted to partner with either Lucent or Nortel.
Now it will have to go it alone.
After the Nortel-Bay deal was announced,
Lucent said it is suing Cisco for infringing
patents on routing, frame relay and ATM
technology. Investors did not care-Cisco's
stock price has risen to $87.85 per share from
$80.69, and its market value rose about $4.25
billion.
The lawsuit is odd. Lucent has performed
beyond expectations since it was spun off
AT&T, but it's not exactly a name in routing,
frame relay or ATM. It paid $1 billion for Yurie
Systems Inc.'s ATM capability and bought Agile
Networks Inc. for its intelligent switching
products, and it resells Bay's internetworking
gear and General DataCom Corp.'s frame relay
and ATM switches. Lucent and Cisco have
talked about a partnership. Some say Lucent
actually offered to merge with Cisco. The
lawsuit looks almost like an act of spite or
perhaps the reverse side of the merger picture:
If you can't join 'em, sue 'em.
In any case, all the mergers mean that network
managers will find themselves with fewer
vendors to deal with, at least in the short term.
Some will like that. Some buy into the idea of
one-stop shopping. It seems most don't want a
single vendor; they'd rather pick and choose.
But the idea that mergers will end innovation
doesn't impress. Ten years ago while walking
to a news conference where Unisys was about
to announce its acquisition of Timeplex, I met
a securities analyst who had just finished a
report on the data networking industry. In
addition to the Timeplex deal, two LAN
hardware companies had recently been
acquired. The analyst complained she would
have nothing to cover-just as her colleague
hinted after the Nortel-Bay deal.
John T. Mulqueen is business editor of
InternetWeek.
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