>>The good news is that Cisco's 2000 shopping spree just became a whole lot cheaper - especially in the optical arena.
This may kill many IPO's and Cisco has more currency than anyone else.
Dow Jones Newswires -- April 18, 2000
SMARTMONEY.COM: On the Prowl?
Dow Jones Newswires
By Alec Appelbaum
NEW YORK -- When you're big, you make a more attractive stock in a bear market. You also make a more believable buyer.
The recent tech sell-off should help executives at Cisco Systems (CSCO), Lucent Technologies (LU) and other communications-equipment giants feel a little more secure. In the past year, comers with promising technology stormed the public markets and suddenly became irritants to established players. Juniper Networks (JNPR) came out with a device that receives and sends Internet traffic faster than anything Cisco had sold. Redback Networks (RBAK) bought another startup, Siara Systems, to whup Lucent in network-management hardware. The upstarts' red-hot stocks meant that the big players' ace - the capital wherewithal to spend on research and acquisitions of companies with promising technology - suddenly seemed less unique.
But now, with tech-stock fervor cooling off, the big companies have a stronger hand to play. Despite strong earnings releases, Juniper has lost 37% of its value since March 2; Redback has lost 62%. The stock prices of Lucent, Cisco and Nortel Networks (NT) are all much healthier.
So it's likely that the younger companies will rein in their own acquisition programs, preferring to build their profits and balance sheets. 'Smaller names might try to buy [startups] but they will be punished severely,' says Wojtek Uzdelewicz, a Wall Street Journal All-Star analyst at Bear Stearns. That means the acquisition field is relatively clear for big, stable companies like Cisco. And Cisco Monday reiterated its plans to make as many as 25 acquisitions this year.
As the likes of Redback, Juniper and Sycamore Networks (SCMR) cool off on acquisitions, the networking startups they might have bought will keep plowing through cash. So the big companies will have lots of potential targets to choose. 'Plenty of companies don't intend to go through the IPO process, and really want to be purchased,' says Stan Schatt, a networking analyst at market research firm Giga Information Group. That means the big players should be able to address their equipment needs - ranging from wireless equipment for Cisco to billing and Web-site management software for Lucent - without worrying too much about unreasonable prices.
So what will they buy? Lucent will look for what Sanford C. Bernstein analyst Paul Sagawa calls 'incremental technologies.' This refers to specific devices that are becoming more popular with Lucent's customers, such as Redback's 'subscriber management system' box, rather than whole new marketplaces. Sagawa, a former Lucent employee, says Lucent may wait for bargains in this market or go shopping for a company that makes management software, such as Amdocs (DOX), while the getting is good.
But observers don't expect a rush of deals right away. Redback Networks might make an ideal Lucent target at the right price. But at a forward P/E of 267, Redback is scarcely a cutout-bin find. Likewise, software players like Akamai Technologies (AKAM) might enhance the big companies' service packages. But Akamai still boasts a market value 1,500 times its 1999 revenues. That's nothing to rush into.
Potential buyers have many reasons to be patient. Not only are the new companies still starkly overpriced by historical standards, but their own stocks make cheaper acquisition currencies than they did two months ago. Lucent and Cisco have billions in earnings that they can spend on companies they really want, but they can't make rapid-fire acquisitions with stock the way they could have last year.
Elsewhere in the telecom world, bargain hunters may be more enthusiastic. Surviving Baby Bells SBC Communications (SBC) and BellSouth (BLS) are still trying to get permission to sell long-distance service, and SBC has agreed to start selling service in markets outside its region just to prove how much it loves local competition. Many observers expect these companies to buy smaller local phone companies as a quick way of getting into new markets. With small companies like WinStar Communications (WCII) and McLeod USA (MCLD) off more than 25% in the past two months, says Phoenix-Engemann Growth fund (PASGX) manager Ned Brines, buying may speed up if the market stays rocky.
Unlike the Baby Bells, which contend with slowing revenue growth and huge fixed costs, Cisco and Lucent can invest in their own research and new products. If the market for tech stocks stays turbulent, that could play to the big equipment players' advantage. 'This [stock market], if it holds, will open the door for a much better acquisition environment,' says Sagawa. 'Cisco would have acquired multiple optical companies [earlier this year] if the price tag had been better.'
Of course, many folks saw Cisco's $8 billion acquisition of Cerent and Monterey Networks, two optical-networking companies with a collective $10 million in revenue, as a sign of market folly when it occurred last summer. Since then, says Schatt, the deals have helped Cisco gain market share in the important new area of equipping networks to carry light-speed traffic, and haven't impeded its revenue growth.
The big networking companies have always acted craftily, whatever the price, and promise to continue doing so now. When vying to rebuild the world's telecommunications systems, you think about bigger things than bargain hunting.
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