Actually, according to the release, they will be valuing the company based on a very prudent calculation which includes Andiamo's actual sales and Cisco's market cap. From all current appearances, it looks as if Cisco has limited their downside risk substantially, while locking in the upside if it materializes.
I think you are just speculating that all corporations are purely evil. What if it turns out that there are good companies out there and that they know how to make good business decisions? I wouldn't be caught on the short side if I were you. There are better shorts out there.
Anyway, if anyone is interested in the article which explains the arrangement a little, see below:
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Cisco's Approach To Pricing Andiamo Said To Reduce Risk
By ANNE BRADY
Of DOW JONES NEWSWIRES
PHOENIX -- Cisco Systems Inc.'s (CSCO) unusual approach to pricing its acquisition of Andiamo Systems Inc., which currently puts the price at anywhere between zero and $2.5 billion, reduces the risk that Cisco will pay too much for the privately held developer of storage switching products, the company and stock analysts said Tuesday.
Cisco, based in San Jose, announced Tuesday that it was exercising its previously disclosed right to purchase the remaining equity interest in Andiamo that it doesn't already own. Cisco has so far funded $74 million of a $184 million investment commitment to Andiamo, and estimates that its investment will be convertible into a 44% equity stake.
However, the purchase price of the remaining equity stake will be based on a formula that will take into account sales by Cisco of Andiamo products during a three-month period shortly before the closing, anticipated to occur in early 2004, no later than July. The valuation of Andiamo will be determined by applying to those sales a multiple based on Cisco's own market capitalization and revenues.
"This is a very prudent method of doing this," said analyst Gina Sockolow with Buckingham Research Group. "They invested in a company several years ago that was basically a piece of paper, and they don't want to get fooled again. ... They're pricing it (this way) as an insurance policy."
Sockolow does not own Cisco shares.
In addition to requiring a successful launch of Andiamo products for the sales price to be substantial, the formula safeguards Cisco against adverse changes in market conditions, noted Soni Jiandani, Cisco's vice president of marketing for storage networking, in an interview.
"Using that creative model, with the right elements of risk and reward, .... reduces (Cisco's) risk," she said. "We have received some very positive comments from analysts on the model as well."
In a research note early Tuesday, A.G. Edwards & Sons Inc. analyst Peter Andrew said the "key" element to the pricing strategy "is that Cisco is going to be paying a price based on known performance/demand of the Andiamo product line."
Analysts agreed that in order for the price to reach $2.5 billion, sales of Andiamo products would have to go exceedingly well, and it's unlikely the price will come in that high. Jiandani called that assessment "fair."
"They're just giving a full range of possibilities," said analyst Matt Barzowskas with First Albany Corp. "The bottom line is, 'How do you value a private company with no track record, that is just rolling out products?' "
A.G. Edwards and First Albany both make a market in Cisco securities. An A.G. Edwards analyst or household member owns a long common equity position.
Analysts generally praised the decision to move forward with the acquisition, saying it will move the company into a high growth market with products that are complementary to its existing products.
The company will be competing in the storage switch market against Brocade Communications Systems Inc. (BRCD) and McData Corp. (MCDTA).
Jiandani said the company believes it has identified problems within the market that current products don't address. In connection with the acquisition announcement, Cisco announced its complete line of Andiamo switches.
"We saw two trends - migration toward the network storage market and overall growth in storage," said Jiandani. "We noted room in the market for innovation. ... We looked at available options and didn't find solutions to identified problems."
Stock analyst Mark Kelleher with First Albany said in a research note that he views Cisco as "a more likely ... threat to the low-end of Brocade's market."
His colleague Barzowskas said the low end of the market may be "a good entry place" for Cisco, but added that "eventually, Cisco is going to try to attack the whole market."
- Anne Brady, Dow Jones Newswires, 602-258-2003;
anne.brady@dowjones.com
Updated August 20, 2002 3:54 p.m. EDT |
