Remember those LUnatics would said Cisco paid too much for Cerent? As always, reality has proven them wrong:
Avoiding The Market's Whims
The valuation issue is a major one, especially for Internet companies. Arguments abound over whether they are worth the valuations given them, but new Internet IPOs continue to soar. Premiums of more than 100% are now commonplace, and five of the 10 best-ever first-day gains for new issues occurred within the past two months.
This would make many companies too expensive to buy after going public. So the trick is to avoid altogether the overexuberant individual investors who would run-up the stock price. Keep the valuation in the hands of the "smart money," the institutions who provide the bedrock capital in an IPO.
This was best seen in the recent acquisition of Cerent Corp. by Cisco Systems Inc. (CSCO). In late August, Cisco agreed to pay $6.9 billion for Cerent, a company that makes products that help make voice and data traffic move more rapidly. The acquisition offer came just a month after Cerent filed for an IPO.
At the time, many on Wall Street questioned the price Cisco was willing to pay - it is believed to be the most ever spent to buy a private company. After all, the critics said, Cerent reported just $10 million in revenue over the first half of this year, for a $29.3 million net loss.
Had Cerent gone public, though, the price tag could have been much higher. Sycamore Networks Inc. (SCMR), a Cerent competitor with comparable revenues, launched an IPO a little more than a month after the Cisco-Cerent deal. The stock soared 386% over its offering price on its first day, valuing the company at $14.24 billion.
By the time the Cisco purchase closed on Nov. 2, Sycamore's market capitalization had risen to $17 billion - more than twice Cisco's $6.9 billion price for Cerent.
"Cisco doesn't look silly now, do they?" Lehman Brothers's Brand said. "For all the talk that they vastly overpaid, experience has shown that they really did get a reasonable deal."
That, however, might be why acquisitions during the IPO process don't happen more often. This year has produced high-profile examples like Cerent and Healtheon Corp.'s (HLTH) purchase earlier this year of WebMD just before WebMD's IPO. But the market frenzy that boosted Sycamore's valuation so high above Cerent's is a powerful lure for executives who hold a significant number of their company's outstanding shares....
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