Risking the rath of James Cramer, the following from TheStreet.com
Top Stories: Will Cisco Enter the
Acquisition Derby?
By Kevin Petrie
Staff Reporter
6/22/98 10:33 AM ET
Expect Cisco (CSCO:Nasdaq) to stick to its knitting while
its competition does big deals.
Shares of the leading networker have climbed 10% this
month even as takeover rumors -- and actual takeovers -- roil
its sector. Competitors are entering big transactions in a bid
to topple Cisco and position themselves for the intermingling
of phone systems with the Internet. But investors expect
Cisco to stay the course, filling holes in its technology suite
by buying small companies -- in other words, doing what has
made it so successful.
On June 3, phone supplier Tellabs (TLAB:Nasdaq)
disclosed plans to merge with Ciena (CIEN:Nasdaq), a
builder of valuable technology for fiber-optic networks, in a
deal valued at about $7 billion. On June 15 Northern
Telecom (NT:NYSE) announced plans to purchase the data
networker Bay Networks (BAY:NYSE), a direct competitor
of Cisco, for stock now worth $7.1 billion. The sector is rife
with speculation that other phone suppliers such as
Ericsson (ERICY:Nasdaq ADR) will buy 3Com
(COMS:Nasdaq) or another data networker.
The tumult hasn't altered the bullish thesis for portfolio
manager Kevin Landis, though he's a little surprised that the
stock isn't "taking it on the chin." Landis' Firsthand Funds
is standing pat with its Cisco investment. The manager
lauds Cisco's success in acquiring new technology without
taking on redundant sales and distribution infrastructure.
Ammar Hanafi, a Cisco business manager, says the
company intends to hold to its strategy. It prefers small
acquisitions to large ones because smaller teams are easier
to integrate.
And others might have bitten off more than they can chew.
"The Nortel-Bay combination represents, in our view, a
significant market-share opportunity for Cisco while the two
companies integrate," wrote Bear Stearns analyst Eric
Blachno in a report last week. "Both companies could get
defocused as they work on unifying diverse cultures,
business processes, sales forces and products." Bear
Stearns hasn't performed underwriting for Cisco, Bay or
Nortel.
As for Cisco: "I think they're going to stick to their strategy,"
says Brian Salerno, co-manager of the Munder NetNet
Fund, which has purchased more Cisco shares this quarter.
The strategy works, Salerno says. For example, by
acquiring the start-up LightSpeed in December, Cisco
secured a voice-signaling technology that might win
hundreds of millions in revenue from phone carriers, for just
$195 million. And LightSpeed has little superfluous sales
structure.
By contrast, Salerno says, Cisco encountered digestive
problems with its bigger purchase of StrataCom for more
than $4 billion in stock in July 1996. Overall, the acquisition
probably was worth it: The unit now furnishes Cisco with
switches that use asynchronous transfer mode, or ATM,
technolgy, one of two crucial pieces in tomorrow's network.
But Hanafi at Cisco says the integration was tough.
Cisco still needs the other crucial piece, an optical
technology called "dense wavelength division multiplexing."
DWDM boxes allow carriers to push numerous waves of light
through a strand of optical fiber simultaneously, greatly
expanding the bandwidth of their networks. Tellabs is buying
the best DWDM company around, Ciena, which raises
questions about whether Cisco missed a big boat.
"They should have bought Ciena," says Craig Johnson,
principal with The PITA Group, a technology research firm.
Ciena is big and expensive, but Johnson says Ciena still is
digestible. There are rumors that Cisco still wants Ciena, but
Cisco declined to comment.
"They can probably conduct business without [DWDM] for
the next year or two," Landis says. Cisco says that for now
it's partnering to get optical technology.
Earlier this spring Cisco paired with Ciena to develop
products jointly and connect its data routers to Ciena's
DWDM boxes.
Other suppliers of DWDM include Lucent (LU:NYSE), which
has lagged Ciena in bringing high-capacity products to
market, along with Pirelli and Northern Telecom. Ciena is
essentially the only pure play in DWDM.
Cisco likely will have to purchase one other technology -- an
optical switch. The optical network of the future will carry
messages in photons -- waves of light -- from start to end.
The missing link is a switch that ensures photonic signals
don't need to be converted to electronic signals and back.
Tellium and Chorum are both developing these optical
switches, which makes them pretty attractive acquisition
candidates for the likes of Cisco. |
