Networking: Ericsson, Siemens Face Currency Quandary as Networking
Deals Abound
By Kevin Petrie
Staff Reporter
thestreet.com
10/28/99 7:22 PM ET
SAN FRANCISCO -- On the Internet, at least, cash isn't always king.
After grabbing a fistful of start-ups in the last year, European
telecom suppliers Ericsson (ERICY:Nasdaq ADR) and Siemens (SMAWY:Nasdaq
ADR) looked ready to stake out a significant chunk of the
fast-consolidating U.S. network-equipment market.
But now currency issues are getting in the way -- acquisition currency,
that is.
A winning bet in this sector could pay off handsomely: Recent
multibillion-dollar IPOs in the networking sector suggest investors
believe the fast-changing Internet-equipment market will be lucrative
for years to come. But as swashbuckling dealmakers such as Cisco
(CSCO:Nasdaq) push up prices for networking properties, the Europeans
face a stiff challenge: Find the means to buy fast or risk losing
relevance.
Ericsson and Siemens, for their part, say rising prices haven't
hampered their acquisition efforts, which they believe to be more
measured and deliberate than their North American rivals. But their
offers of cash or American depositary receipts, which are shackled in
part to the firms' rambling and unfamiliar businesses, have become less
appealing to U.S. telecom start-ups. President Bob Emery of Robertson
Stephens, which has advised deals involving Lucent (LU:NYSE) and
Ericsson, says, "It is unquestionable that Cisco's valuation gives it a
competitive advantage."
Going to the Sky
Cisco and North American rivals Lucent and Nortel (NT:NYSE) are
enticing potential targets with mountains of richly valued stock, which
has helped push the average takeout price in the sector as much as 50%
higher over 18 months, according to David Schantz, partner with the
venture-capital firm Matrix Partners. (Matrix has sold companies to all
the publicly held networkers mentioned in this story.) Cisco recently
agreed to pay a stunning $7 billion in stock for the fledgling
fiber-optic supplier Cerent, which has reported sales of just $10
million, in one of 13 acquisitions Cisco has announced this year.
The Cerent deal helped "shut out the competition from the M&A world,"
by raising the stakes, says Spencer Punter, partner with venture
capitalist Bowman Capital (an investor in TheStreet.com Inc.
(TSCM:Nasdaq), publisher of this Web site). To find the right
acquisitions, Punter says, Cisco rivals such as Siemens and Ericsson
will have to quickly pounce on leading targets -- or shop for
leftovers.
Ericsson and Siemens run the risk of slipping behind in the "race to
pull all the pieces together," according to equity analyst Pete
Peterson with Volpe Brown Whelan, not a banker for these companies.
Peterson rates Ericsson hold, but doesn't officially cover Siemens. His
colleague Tim Savageaux says Ericsson and Siemens might need to buy
more aggressively if they intend to mount a broad-based attack, as
they've planned, rather than competing in a few niche markets.
Out of the Mix?
Earlier this year the Europeans planted themselves in certain niches
such as network routers. Ericsson poured roughly $550 million in cash
into three acquisitions and a majority investment. While its largest
recent acquisition, Torrent Networking, still isn't shipping product
yet, Ericsson's earlier investment in the high-profile start-up Juniper
Networks (JNPR:Nasdaq) enables Ericsson to deliver routers to carriers.
Siemens' Unisphere also scarfed down three start-ups, two of which now
are shipping product, and made a majority investment for a total of
roughly $1 billion cash. Just months ago, that was a lot of money.
"It seemed like it was a huge European invasion," says Savageaux. But
in the June quarter the European companies sold far fewer routers and
large switches to carriers worldwide than did North American
competitors Cisco, Lucent or Nortel, according to recent surveys by
market researcher Dell'Oro Group. And while the Europeans just need
time to bring some acquisitions to fruition, they also need to keep
acquiring. But they've shown little urgency.
"The Europeans have a lot of cash, but they're not the ones I worry
about beating to the punch," says Nortel CEO John Roth. "They're not in
the fray." His company, already entrenched with North American
carriers, has been buying at a rate of one company per quarter.
The Virtue of Modesty
Both companies say they intend to keep their expansion plans modest --
and affordable. Ericsson's marketing vice president Laura Howard says
the company will keep extending its "string-of-pearls" strategy at a
pace that ensures it can digest properly. Siemens' Burlington,
Mass.-based networking arm, Unisphere, likely will acquire one or two
more companies by the end of 2000, according to Unisphere CEO Martin
Clague. He says he doesn't need to shop as aggressively as Cisco,
because Siemens already boasts global service operations and
phone-based network systems. He sniffs at Cisco's Cerent purchase,
saying, "I wouldn't have had Cerent on my radar screen for half that
price."
His Parisian peer Alcatel (ALA:NYSE ADR), which has spent $7 billion on
U.S. acquisitions in 13 months, has filled its suite of Internet
technology more extensively than Ericsson or Siemens, according to
equity analyst Angela Dean with Morgan Stanley Dean Witter. Partly for
those reasons, Dean rates Alcatel buy and the other two stocks hold.
Her firm has acted as an investment banker for all three companies.
Sealing the Deal
Meanwhile, Cisco plans to seal at least 20 additional acquisitions on
both sides of the Atlantic in the next year, largely using its stock.
(Cisco officials didn't respond to numerous requests for comment.)
Because Cisco is valued at 90 times operating earnings for the last
four quarters, compared to 64 for Ericsson and 30 for Siemens, it is
comfortable lavishing lots of stock on acquisition targets.
Analyst Savageaux proposes a solution for the Europeans: Create their
own acquisition currency by listing separate shares for their U.S.
Internet-gear subsidiaries. Sycamore Networks' (SCMR:Nasdaq) stunning
debut on the Nasdaq Friday underscores the value of uncorking all that
market enthusiasm for futuristic Internet systems.
Siemens' Clague won't comment on the possibility, except to say that
right now he's focused on building two or more quarters of revenue
growth at Unisphere's acquired units. Ericsson's Laura Howard says that
her company needs its U.S. unit to be closely integrated with the
global operations and that creating a separate stock has not proven
necessary either for recruiting or acquisition efforts.
Meanwhile, Cisco widens its lead. |
