CSCO: Silicon Valley
My Opinion: Analysts are analyzing this decision, CSCO will move slow for a couple of days down/up, This is an incredible strategic move, and an excellent buying opportunity while the dust of the price tag settles. Mark these words CSCO will be over 130 By the end of the month, perhaps sooner. Article on deal attached.
Apr 14, 1999
Cisco Starting to Buy Big
By Kevin Petrie
Staff Reporter
Usually a bite-sized acquirer, Cisco (Nasdaq:CSCO - news) is starting to show an appetite
for bigger deals.
On Tuesday, the leading supplier of network routers and switches disclosed plans to buy
GeoTel Communications (Nasdaq:GEOC - news) , a software supplier for call centers, in a stock-pooling transaction valued
at $2 billion. The acquisition is expected to close in the quarter ending July 31.
The deal, a surprisingly ambitious one for Cisco, comes as its competitors are escalating their own M&A efforts. Also on
Tuesday, Stockholm-based telecom supplier Ericsson (Nasdaq:ERICY - news) said it will buy startup Torrent Networking,
a builder of network routers that will compete with Cisco, for $450 million cash. And Nortel (NYSE:NT - news) said it will
pay $340 million in cash and stock for Shasta Networks, which was founded by former Cisco executives.
Amid the feeding frenzy, Cisco has quietly departed from its slow-but-steady style of acquiring small, private companies. The
company has bought bigger companies before -- In April 1996, it bought StrataCom, a builder of network switches for
carriers, for $4 billion in stock -- but there are signs that Cisco could be going after bigger companies with more frequency
now.
So while Ammar Hanafi, director of business development with Cisco, says the size of the GeoTel deal is "atypical," industry
followers believe that with competition increasing, Cisco has decided to broaden its campaign to develop a rich array of voice
and data network products.
"I think that Cisco-GeoTel is a telling transaction," says Greg Rossmann, principal with the investment bank Broadview
International. "It's an announcement that their risk profile is more aggressive and broader than it was in the past."
The risk, says Rossmann, is in branching from Internet infrastructure into call-center software -- not the company's core
expertise.
Nor can Cisco stay immune to the forces that are pushing its peers into more acquisitions. "I think the pace at which this market
is moving is putting pressure on all of us" to develop network technology and acquire companies where needed, says Laura
Howard, marketing vice president with Stockholm-based Ericsson.
Cisco is spending more on GeoTel than it has on almost any acquisition in recent memory. For example, last week it paid $445
million in stock for two private startups, Fibex and Sentient Networks. Cisco also will pony up more than $6 million in stock
per GeoTel employee, signaling that overall M&A prices are rising in this sector. Cisco paid roughly $4 million in stock per
employee for Granite Systems in late 1996 and also for Ardent Communications in mid-1997.
Cisco's acquisition history doesn't include many expensive, public companies. At the time of its purchase by Cisco, StrataCom
was an established, publicly-traded company with a sales force. Analyst David Passmore with consulting firm NetReference
says that digesting it involved some "heartburn."
GeoTel has a sizable sales staff and customer base which will take some work to integrate with Cisco's own. Cisco has
repeatedly stated that mergers of mature tech companies, such as Lucent's (NYSE:LU - news) pending acquisition of Ascend
(Nasdaq:ASND - news) , are difficult because of those challenges. Cisco usually takes a simpler tack, acquiring startups that
are basically a team of engineers with a promising product.
"This is a different kind of an acquisition," says Cisco vice president Mike Volpi, the San Jose, Calif.-based company's point
man on most of its deals. To avoid culture clashes, Cisco intends to give GeoTel's salespeople independence.
Cisco is entering a market controlled largely by telecom rivals Lucent and Nortel -- that is, the market for corporate call
centers, which for a decade have been slowly integrating computer functions with telephone systems. GeoTel software
advances this trend, enabling service-desks to sort incoming customer calls and minimize waits.
Even with the risks, many industry experts say Cisco is making a shrewd wager.
Cisco is wise to use its towering share price to pay handsomely for a company's market position and talented employees, says
Phil Lamoreaux with Lamoreaux Partners, a Cisco shareholder. "If it's strategic to their business, whether they paid $1.5
billion or $2 billion is petty change to them." |
