This guy knows his stuff imo
Regards
Glenn
COMMENTARY >> TECH SAVVY
As Always, Cisco's Making All the Right Moves
By Jim Seymour
Special to TheStreet.com
8/26/99 10:39 AM ET
Yo, John! Wanna buy my company? Heck, I don't even have a
networking/tel-tech/fiber/routing-technology company. But at these prices, I'll start one
damned fast. You just watch. I'll get back to you, John.
It's said that CEO John Chambers choked when he first heard the proposed $6.9 billion price tag for
Cisco's (CSCO:Nasdaq) latest acquisition, Cerent. But in the end he said yes, and shareholders ought to
send him personal thank-you notes for this leap of faith.
The price was a result of the barn-burning market performance of other tel-tech companies this year. Since
its IPO in late June, Juniper Networks (JNPR:Nasdaq), for example, has seen its market value soar to
almost $11 billion. Clearly Cerent used that as a benchmark to drive up the price Cisco paid; with a pending
IPO, hot technology and products in a scalding-hot market, and the right customers, Cerent held all the
cards.
Cisco's been on an acquisition tear lately, of course -- as has Lucent (LU:NYSE) (which I am long), its big
competitor in equipping fast networks -- but the Cerent deal has gotten much attention this morning because
of its audaciousness. Cisco spent almost $7 billion of shareholders' money on a tiny, 200-person company
begun just a little over two years ago, with a grand total of $10 million in sales over that time. Ten million!
Hoo-boy: big-time! (John, I can hit $10 million in less than 12 months.)
In fact, unlike fill-in-a-gap acquisitions, Cerent powerfully extends Cisco's reach. After dominating the
corporate-networking market, Cisco had to look further afield, and settled, logically enough, on tel-tech. But
it has only some of the products the big fiber-network outfits need. Cerent's products and technology bridge
the fast, long-haul networks being built and run by the likes of Qwest (QWST:Nasdaq), Frontier
(FRO:NYSE) and Williams Communications (WMB:NYSE) into local networks. No one, no one, has
products that bridge data and voice into local systems nearly so well as do the Cerent tools. As Qwest,
Frontier and Williams, along with others, will testify: They're lining up at Cerent's check-out counters with
very big baskets, indeed.
This is obviously a big win for Cerent investors, too: Silly Valley VC giant Kleiner Perkins put $8 million
into Cerent two and a half years ago (and partner Vinod Khosla in Cerent's chairman's seat) ... and will
collect $2.1 billion in Cisco shares. Nice.
Now, as I was saying, John ... let me tell you about the networking-technology company I
formed a couple of minutes ago, right after I started this column. I figure our IPO next month
will set us up with a market cap of about $1.5 billion -- sure to soar over the succeeding
month -- so that's where you and I can start talking...
Seriously, the pace and cost of tel-tech expansion is breathtaking -- and ought to be. Cisco and others, very
much including Lucent, which are today positioning themselves for the tel-tech future, will earn enormous
returns on these strategic technology investments.
Not all the smart investments, we should note, are in technology: Remember Cisco's recent investment of
$1 billion in KPMG's consulting practice? That was a frontal assault on Lucent (which around the same time
acquired consultant International Network Services for $3.7 billion) and on the networking business in
general. Not only can Cisco tap its own thousands of sales reps; under the KPMG deal, KPMG will add
another 4,000 consultants, specially trained to set up Cisco products in corporate networks.
Another brilliant stroke.
Cisco was up a couple of dollars here Wednesday, but down seventy-five cents in overnight trading in
Europe. That must have been a knee-jerk response in Europe to the price of the Cerent deal, and the dilution
Cisco holders will take; but it was a foolish response. Thursday morning the stock was up fractionally to 69
1/16.
It seems to me Cisco's doing exactly what it should be doing right now. Lucent's doing well, and will
continue to do so -- I think smart investors hold both -- but this acquisition sets Cisco apart, in terms of a
broad and far-seeing vision and the willingness to put big bets on the table.
The "Chicago Bulls of the Nasdaq," per JJC, just did it again. |
