This puts a little more light on the strategy of CSCO/KPMG and LU/INS:
newsalert.com 11, 1999 06:01
Cisco and Lucent bet on consulting convergence
Consulting and integration services appear to be the new weapon of choice in the intensifying battle between Lucent Technologies (NYSE: LU) and Cisco Systems (Nasdaq: CSCO) to sell their data and voice networking platforms into corporate America.
Just a day after Cisco announced a deal in which it would invest approximately $1 billion in the consulting firm KPMG International, Lucent Technologies on Tuesday announced an agreement to merge with International Network Services (Nasdaq: INSS), a consulting firm that focuses on data networking design and management, in a deal worth approximately $3.7 billion.
Both deals mark a shift away from the sale of point products and a move toward large-scale integration of networking equipment and services. Consulting services are becoming increasingly important for both Lucent and Cisco in their efforts to promote data networking and telecommunications platforms that can be sold across entire corporations or large service-provider infrastructures."The box-only business is dying fast," says Maribel Lopez, analyst with Forrester Research (Nasdaq: FORR). "These acquisitions illustrate both Lucent and Cisco's fear of hardware commoditization and their commitments to creating strategic advantage by hook or by crook."
Under the terms of the agreement between Lucent and INS, each share of INS stock will be converted into 0.8473 shares of Lucent. Based on Lucent's August 9 closing stock price of $63.63, the merger would be valued at approximately $3.7 billion, or about $54 per INS share.
In Cisco's deal with KPMG, Cisco will invest $1 billion in KPMG, enabling the consulting firm to add 4,000 Internet integrators over the next 18 months. Cisco, in turn, will receive a stake in the new KPMG Internet business unit.
BE AGGRESSIVE
Despite the fact that both companies affirmed their need for consulting support, Lucent appears to be taking a more direct approach with its outright acquisition of INS, which it plans to combine with its own NetCare services and consulting business.
Lucent officials confirmed that they see consulting services as crucial to the company's growth.
"There is no question that professional services and support is critical to our business," said Pat Russo, Lucent executive vice president of strategy and corporate operations, in a Tuesday conference call. "That can be summed up in one word: convergence. In today's multivendor environment, services and support are increasingly critical."
"Lucent's always been more aggressive in this approach," says Jim Parmalee, analyst with Credit Suisse First Boston. "It's all about time to service. ... If you can reduce time to service, you will ingratiate yourself with customers."
Mr. Paramalee says that while both Cisco and Lucent are using the consulting business as a strategic tool in their competition with one another, both companies still have a reputation for strengths in different categories of the data networking and telecommunications business. Cisco is known for its IP-based networking gear, says Mr. Parmalee, while Lucent is known for its optical, wireless, and voice equipment.
Ms. Russo noted that Cisco's and Lucent's simultaneous moves to shore up consulting support is indicative of the strategic importance of that business. "As Cisco's investment in KPMG shows, it's pretty clear," she said. "You can't be a leader in communications unless you get into services."
The merger is expected to be completed during Lucent's first quarter of fiscal 2000, which ends on December 31, 1999, and will be accounted for as a pooling of interests. Lucent officials indicated that the deal is not expected to have an impact of the current earnings forecasts.
CONFLICTS OF INTEREST
Although officials from both companies downplayed the strategic intrigue of the deal, INS's close ties to Cisco and the political nature of the consulting business indicate that the competitive activity between Cisco and Lucent is heating up.
Cisco owns a little under 7 percent of INS, so the acquisition of INS by Lucent represents a complete shift in allegiance for the company. Cisco declined to comment on whether it will hold its shares in INS through their conversion into Lucent stock. Cisco's initial investment of a little over $2 million -- made before INS went public in 1996 -- is now worth approximately $250 million.
In addition to holding a large stake in INS, Cisco is one of INS's biggest customers. A Cisco vice president, Donald A. LeBeau, has sat on the INS board since October 1994.
Lucent officials downplayed the apparent conflict with INS's Cisco legacy, saying that the company continues to view consulting and integration as a "multivendor" affair. "In networks today, it's very hard to find any single-vendor networks," said Ms. Russo. However, Ms. Russo also affirmed that this was an opportunity to exert influence on INS customers. "There clearly is an opportunity to assure that lucent's capabilities in data networking are well understood," she says.
The ownership of INS by Lucent may raise questions from customers who expect an objective third-party outlook from a consultancy. For example, attempts to market Lucent products through INS may not be welcomed by existing INS customers.
"Their reputation has to be above the board," says Mr. Parmalee. "They will need to bend over backwards to prove this."e given away your entire customer base to competitors," he says.
LUCENT TECHNOLOGIES - LU
Price 61 5/8
Net Change -2.00
Volume (000) 11350
Day High 64 3/16
Day Low 60.00
CISCO SYSTEMS - CSCO
Price 58 3/4
Net Change -1 1/16
Volume (000) 725
Day High 60 5/8
Day Low 56 5/32
INTL NETWORK SVCS - INSS
Price 50 7/16
Net Change +3.00
Volume (000) 5332
Day High 52 3/8
Day Low 48 15/16
as of
08/11/99 09:13 AM EDT
Only $9.99 per trade. |
