Kemble
Hi.
This is from the street.com.....
Networking: IBM Cedes Network Hardware Game to Cisco
By Kevin Petrie and Eric Moskowitz
Staff Reporters
8/31/99 9:11 PM ET
SAN FRANCISCO -- Firming their friendship, IBM (IBM:NYSE) is handing
Cisco (CSCO:Nasdaq) the keys to its network-hardware business.
Big Blue said Tuesday morning it will stop making the routers and
switches that run computer networks. Instead, Cisco will buy IBM's
patents and move its estimated 30,000 customers to Cisco gear.
Steve Milunovich, an analyst with Merrill Lynch, estimates that Cisco
is buying the rights to IBM products that brought in annual sales of
$375 million to $450 million. Cisco's revenue totaled $12.2 billion in
its fiscal year ended in July. But the deal potentially will boost
Cisco sales by as much as $5 billion over five years, according to
Cisco senior vice president Selby Wellman.
The deal is the latest effort by Cisco to strike partnerships that can
furnish its customers with service and support. Early this month it
invested more than $1 billion in the consulting firm KPMG.
For its part, IBM has won increased service contracts with Cisco
customers. Also, Cisco has committed $2 billion to IBM, including the
purchase of IBM components. While IBM will keep building other network
systems, it's largely focused on components and services, not network
products.
"The deal is a major coup for Cisco, and gives IBM some cash in return
for killing off a significant portion of its struggling networking
division," wrote Ryan Hankin Kent analysts Matt Walker and Joe Skorupa
in a report.
And Cisco's customers -- corporations and service providers alike --
need IBM's consulting services. "This stuff has gotten incredibly
complicated," says Jeremy Duke, president of the consulting firm
Synergy Research Group. "It requires a lot of handholding and
guidance." Cisco is a client of Synergy.
Cisco and IBM have long sold products and services jointly. By making
peace in network hardware, Wellman says, "you're removing a major
inhibitor and constraint from the two companies doing everything
together." He says IBM suggested the truce to Cisco in March.
The network hardware division, or NHD, as it is called by those inside
Big Blue, has been a loss leader for the company for some time, says
Joe Ferlazzo, vice president at research firm Technology Business
Research Group. "It was decided at IBM that hardware products were no
longer going to be a strategic imperative," says Ferlazzo. "IBM missed
the key switch to Ethernet two years ago and hasn't been able to
compete with Cisco ever since."
According to research firm Dell'Oro Group, Cisco claimed a 74% share of
the router market and 44% of the corporate switch market in the second
quarter, compared with 2% and 1% for IBM, respectively.
Ferlazzo says IBM is quickly realizing that the network semiconductor
market is growing faster than the PC chip market. He speculates that
IBM might partner with 3Com (COMS:Nasdaq).
IBM Technology Group's Chris Sciales wouldn't comment on additional
moves, but did promote a significant product announcement the company
would have later this week. As it fills its services division, IBM
likely will move some staff from its Raleigh, N.C.-based network
hardware division, according to Sciales. IBM plans to extend its reach
beyond hardware, providing its prolific patented technology to others.
In the past, IBM would watch more nimble players take advantage of its
breakthroughs, while it received no compensation in return. This latest
deal ensures them that they can gain new revenue streams from not just
the hardware industry, but the networkers as well.
But unlike its previous deals in the computer industry, IBM will rely
on Cisco to build its network hardware revenue stream. Fortunately for
IBM, that's not a bad bet to let ride into the new millennium.
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Could a DELL deal be next??????
Best,
Steve |
