interesting assessment of the INS deal and LU/CSCO in general..
Vancouver, BC, August 18 /SHfn/ -- The gauntlet has been thrown down. It's Lucent Technologies [LU] versus Cisco Systems [CSCO] as Lucent's intention to acquire International Network Services [INSS] may cause tensions to erupt. The proposed deal with INS might potentially set the stage for a volatile scenario, as the INS board would be in an awkward position, what with a Cisco executive presently serving. Fireworks are imminent as the two communication technology giants prepare to stake their claim to market dominance.
Lucent's $3.7 billion stock deal with INS is sure to draw CSCO, the world's number one networking equipment maker, into a fierce battle for market control. The intended acquisition will see LU swap $0.8473 (about $54) for each INS share, which represents a 14% premium over the closing INS share price when the deal was announced. The transaction is expected to close before the end of the year and will not add to earnings in fiscal 2000.
The proposed deal is somewhat of a market coup for Lucent, the world's number one telephone equipment manufacturer. This melding of tech partners is equal to Lucent poking a stick in Cisco's eye, considering Cisco has been a long time INS partner. According to Cisco's most recent proxy statement, Cisco currently controls 7.8% of INS' shares. In addition, the vice president of Cisco's service group sits on the INS board.
Based on Cisco and INS' significant business relationships in the past, this factor could ignite a fiery struggle between Lucent and Cisco. Essentially, Cisco will become a minority shareholder in an enterprise controlled by their arch-rival. What is the likely outcome? The board seat will probably be reassigned and the 7.8% ownership relinquished, most likely at a premium.
CSCO is not one to sit and contemplate lost opportunity. Dave Heger, an analyst with A.G. Edwards [AGE] agrees: "I would be surprised if [Cisco] kept their Lucent shares. I would think they will wind down their involvement in INS."
In a weekend missive that sent analysts scrambling, CSCO announced it was expanding its ties with KPMG LLP and would invest $1 billion in KPMG's consulting arm. KPMG has announced it will use the money to hire 4,000 engineers to develop and deliver Internet-based data, voice and video services to clients worldwide.
As traditional phone networks merge with computer and data networks, corporations and phone companies will need more help in piecing together the myriad of complex systems. The battle to be fought will involve the technology used to combine voice, data and video traffic on a single network, known in the industry as "asynchronous transfer mode".
Lucent's move to acquire INS is a clear indication they have advanced into the fray, a move that will quickly strengthen their efforts in helping customers blend voice and data networks, but pit them against a possible CSCO counterattack. However, did Lucent pay too much for INS? "When you look at it on an earnings multiple basis, I wouldn't say it was a great bargain," says Heger.
On the other hand, as complex voice and data networks merge, the consulting and solutions business becomes an essential component to the viability of industry giants like Cisco and Lucent. The Lucent-INS deal would certainly be advantageous for Lucent. INS bills itself as the world's largest independent networking consultant, while Lucent's NetCare Services Division will form the largest multi-vendor network solutions company in the world after combining operations with INS. Thus, the follow-through of such an acquisition would give Lucent the market edge over Cisco.
To date, the relationship between industry titans Cisco and Lucent has been relatively business-like. Cisco's CEO, John Chambers has made no secret about the level of competition between the two in past reports. In an August 11 San Jose Mercury News story, Mr. Chambers was quoted as saying: "Lucent's weakness is that it's open to best-of-class competition in all its businesses."
The opportunity to take a jab at Lucent in direct reference to the INS deal was evident as Chambers went on to state: "We prefer to follow a horizontal model and work with other players, such as KPMG. I cannot afford to compete with my partners." It sounds as if the gloves are coming off and we expect increased market activity and a heated exchange between these two communication titans. |
