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.
Jim Seymour is president of Seymour Group, an
information-strategies consulting firm working with
corporate clients in the U.S., Europe and Asia, and
a longtime columnist for PC Magazine. Under no
circumstances does the information in this column
represent a recommendation to buy or sell stocks.
At time of publication, Seymour was long Lucent
and Qwest, although positions can change at any
time. Seymour does not write about companies that
are consulting clients of Seymour Group, or have
been in recent years.
thestreet.com |
