Cisco Systems Is Giving Up the Hunt for a Partner
By SETH SCHIESEL
Cisco Systems, acknowledging that it has tried and failed to forge partnerships with Lucent Technologies and Northern Telecom of Canada, now intends to continue alone in defending its leadership in the increasingly competitive market for advanced data-networking equipment.
The networking industry has been roiled in recent weeks by big-name mergers and by the emergence of a legal dispute between Cisco and Lucent. In an interview Sunday evening, John T. Chambers, Cisco's chief executive, explained how Cisco intended to move forward in the rapidly evolving networking business.
Chambers said that Cisco intended to be one of the independent makers of networking equipment left standing after the industry consolidated into a handful of players. He took jabs at Lucent and Northern Telecom, North America's largest makers of traditional telecommunications equipment, saying they were ill equipped to compete in the technology marketplace of the future.
The strategy and rationale will also be detailed by Chambers on Tuesday in a memo to the company's 12,000 employees.
The basic architecture of big communications networks is evolving toward an emphasis on data rather than voice traffic. That shift is forcing a convergence -- and new competition -- between makers of data-networking equipment, like Cisco, and older telephone-based companies such as Lucent and Northern Telecom.
"As this consolidation occurs, Cisco is in a very unique position," Chambers said. "Voice traffic is going to come under a data infrastructure and that is where we are strong."
He added, "Lucent says, 'You're our main competitor.' Nortel says, 'You're our main competitor.' "
Cisco's success in the marketplace has been reflected on Wall Street. The company has become one of the most widely held stocks among institutional investors in recent years, riding the explosion in demand for networking technology to a market value of more than $85 billion on revenue last year of $6.4 billion. Northern Telecom, with sales of $15.4 billion, has a market value of about $28 billion.
The makers of telecommunications equipment are trying to move quickly because Cisco is making inroads among theit traditional customers. When Sprint announced an ambitious plan earlier this month to upgrade its network, the major equipment partner was Cisco, not a traditional telecommunications company.
Qwest Communications International, the new long-distance carrier, and US West, the Bell local telephone company, are also working closely with Cisco, which is trying to negotiate significant deals with other Bells as well.
"We're not going after Lucent or Nortel," said Don Listwin, an executive vice president at Cisco who runs the unit that sells equipment to big telecommunications carriers. "We're going after the market, and they happen to be there."
A big question in the industry and on Wall Street is: Will Cisco go there together with Lucent or Northern Telecom, either in a wide-ranging partnership or in a titanic merger?
Many companies have loudly proclaimed the virtues of independence only to agree to a lucrative takeover deal, and Chambers acknowledges that he will continue to consider smaller acquisitions. But when he talks about any potential merger of his company with a telecommunications giant, he uses strong language.
"We are not going to do a blockbuster merger with somebody else," Chambers said. "Zero chance. It would be a disaster for the shareholders."
Chambers said he was adamant mostly because of cultural differences between Cisco and Eastern telecommunications titans. Lucent is based in Murray Hill, N.J.; Northern Telecom in Brampton, Ontario. Were Cisco, which is based in San Jose, Calif., to merge with one of them, its most valuable asset -- its intellectual capital -- could walk out the door, Chambers said.
"In our industry you are not acquiring geographic territory, you are acquiring people," Chambers said. "Our people have no interest in working for a company like that.
"Lucent is trying to compete in a New World environment when they're an Old World company in terms of the rules of the Internet economy."
Chambers did not always think that way. He approached both Lucent and Northern Telecom early last year about possibly forging a strategic partnership. But the talks foundered because both companies wanted to develop products that would compete directly with Cisco's.
Cisco was willing to forgo competing in the core telecommunications markets for big phone switches and corporate phone systems. In return, Cisco wanted any potential partner to refrain from moving into Cisco's main product area: high-speed Internet switches.
Lucent and Northern Telecom refused.
Daniel C. Stanzione, the executive vice president who runs the Bell Laboratories unit of Lucent, said in an interview on Monday, "My feeling was that as we reviewed it here internally, they wanted the attractive spaces to themselves and wanted to leave the unattractive space to us."
Executives close to the discussions between Lucent and Cisco said the talks broke off three or four months ago. But the symbolic end may have come just last week when Lucent filed a lawsuit against Cisco, accusing Cisco of infringing eight of Lucent's patents.
"Symbolically it's huge," Chambers said of the suit. "It shows that some companies don't have a way to compete in this new market."
Stanzione said the filing of the lawsuit was not related to the collapse of the partnership talks.
Executives close to Cisco said that the partnership discussions with Northern Telecom fell apart a month ago because of the same sort of competitive concerns that torpedoed the talks with Lucent.
Talks between Cisco and Northern Telecom officially ended earlier this month, when Northern Telecom announced that it had agreed to acquire Bay Networks for $9.1 billion in stock. Bay has been Cisco's main competitor in the market for equipment that switches Internet data between different points at high speeds.
"The way these people are trying to move is very high risk," Chambers said of Northern Telecom's senior executives. Referring to the lukewarm reception the Bay deal received on Wall Street, he added, "It wasn't so much an issue of Nortel overpaying as it was whether the market thinks they can really pull that off."
Northern Telecom declined to comment.
On Monday, investors demonstrated confidence in all three big networking players. Cisco's shares rose $1.50, to $84.625, in NASDAQ trading. On the New York Stock Exchange, shares of Lucent rose $2.50, to $74.75, while shares of Northern Telecom closed at $53.9375, up $1.
Tuesday, June 23, 1998
Copyright 1998 The New York Times
|
