latest article on consolidaton in network equipment:
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Oct 29, 1999
Ericsson, Siemens Face Currency Quandary as
Networking Deals Abound By Kevin Petrie
Staff Reporter
SAN FRANCISCO -- On the Internet, at least, cash isn't always king.
After grabbing a fistful of start-ups in the last year, European telecom suppliers Ericsson and Siemens
looked ready to stake out a significant chunk of the fast-consolidating U.S. network-equipment market.
But now currency issues are getting in the way -- acquisition currency, that is.
A winning bet in this sector could pay off handsomely: Recent multibillion-dollar IPOs in the
networking sector suggest investors believe the fast-changing Internet-equipment market will be
lucrative for years to come. But as swashbuckling dealmakers such as Cisco push up prices for
networking properties, the Europeans face a stiff challenge: Find the means to buy fast or risk losing
relevance.
Ericsson and Siemens, for their part, say rising prices haven't hampered their acquisition efforts, which
they believe to be more measured and deliberate than their North American rivals. But their offers of
cash or American depositary receipts, which are shackled in part to the firms' rambling
and unfamiliar businesses, have become less appealing to U.S. telecom start-ups. President Bob Emery
of Robertson Stephens, which has advised deals involving Lucent (NYSE:LU - news)
and Ericsson, says, "It is unquestionable that Cisco's valuation gives it a competitive advantage."
Going to the Sky
Cisco and North American rivals Lucent and Nortel (NYSE:NT - news) are enticing potential
targets with mountains of richly valued stock, which has helped push the average takeout price in the
sector as much as 50% higher over 18 months, according to David Schantz, partner with the
venture-capital firm Matrix Partners. (Matrix has sold companies to all the publicly held networkers
mentioned in this story.) Cisco recently agreed to pay a stunning $7 billion in stock for the fledgling
fiber-optic supplier Cerent, which has reported sales of just $10 million, in one of 13 acquisitions Cisco
has announced this year.
The Cerent deal helped "shut out the competition from the M&A world," by raising the stakes, says
Spencer Punter, partner with venture capitalist Bowman Capital (an investor in TheStreet.com Inc. To
find the right acquisitions, Punter says, Cisco rivals such as Siemens and Ericsson will have to quickly
pounce on leading targets -- or shop for leftovers.
Ericsson and Siemens run the risk of slipping behind in the "race to pull all the pieces together,"
according to equity analyst Pete Peterson with Volpe Brown Whelan, not a banker for these companies.
Peterson rates Ericsson hold, but doesn't officially cover Siemens. His colleague Tim Savageaux says
Ericsson and Siemens might need to buy more aggressively if they intend to mount a broad-based attack,
as they've planned, rather than competing in a few niche markets.
Out of the Mix?
Earlier this year the Europeans planted themselves in certain niches such as network routers. Ericsson
poured roughly $550 million in cash into three acquisitions and a majority investment. While its largest
recent acquisition, Torrent Networking, still isn't shipping product yet, Ericsson's earlier investment in
the high-profile start-up Juniper Networks enables Ericsson to deliver routers to carriers. Siemens'
Unisphere also scarfed down three start-ups, two of which now are shipping product, and made a
majority investment for a total of roughly $1 billion cash. Just months ago, that was a lot of money.
"It seemed like it was a huge European invasion," says Savageaux. But in the June quarter the European
companies sold far fewer routers and large switches to carriers worldwide than did North American
competitors Cisco, Lucent or Nortel, according to recent surveys by market researcher Dell'Oro Group.
And while the Europeans just need time to bring some acquisitions to fruition, they also need to keep
acquiring. But they've shown little urgency.
"The Europeans have a lot of cash, but they're not the ones I worry about beating to the punch," says
Nortel CEO John Roth. "They're not in the fray." His company, already entrenched with North
American carriers, has been buying at a rate of one company per quarter.
The Virtue of Modesty
Both companies say they intend to keep their expansion plans modest -- and affordable. Ericsson's
marketing vice president Laura Howard says the company will keep extending its "string-of-pearls"
strategy at a pace that ensures it can digest properly. Siemens' Burlington, Mass.-based networking
arm, Unisphere, likely will acquire one or two more companies by the end of 2000, according to
Unisphere CEO Martin Clague. He says he doesn't need to shop as aggressively as Cisco, because
Siemens already boasts global service operations and phone-based network systems. He sniffs at
Cisco's Cerent purchase, saying, "I wouldn't have had Cerent on my radar screen for half that price."
His Parisian peer Alcatel (NYSE:ALA - news) ADR), which has spent $7 billion on U.S.
acquisitions in 13 months, has filled its suite of Internet technology more extensively than Ericsson or
Siemens, according to equity analyst Angela Dean with Morgan Stanley Dean Witter. Partly for those
reasons, Dean rates Alcatel buy and the other two stocks hold. Her firm has acted as an investment
banker for all three companies.
Sealing the Deal
Meanwhile, Cisco plans to seal at least 20 additional acquisitions on both sides of the Atlantic in the
next year, largely using its stock. (Cisco officials didn't respond to numerous requests for comment.)
Because Cisco is valued at 90 times operating earnings for the last four quarters, compared to 64 for
Ericsson and 30 for Siemens, it is comfortable lavishing lots of stock on acquisition targets.
Analyst Savageaux proposes a solution for the Europeans: Create their own acquisition currency by
listing separate shares for their U.S. Internet-gear subsidiaries. Sycamore Networks'stunning debut on
the Nasdaq Friday underscores the value of uncorking
all that market enthusiasm for futuristic Internet systems.
Siemens' Clague won't comment on the possibility, except to say that right now he's focused on building
two or more quarters of revenue growth at Unisphere's acquired units. Ericsson's Laura Howard says
that her company needs its U.S. unit to be closely integrated with the global operations and that creating
a separate stock has not proven necessary either for recruiting or acquisition efforts. Meanwhile, Cisco
widens its lead.
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