Tag: CSCO

Will a stabilized Cisco step back into the market?

Brenon Daly

Contact: Brenon Daly

After back-to-back quarters that roughed up the networking giant, Cisco reported on Wednesday a reasonably strong close to it fiscal year. Fourth-quarter revenue and earnings at the company topped Wall Street’s expectations, and included a rebound in Cisco’s core switch business. The company also projected that its overall growth would continue in the current fiscal first quarter, although the rate would be just 1-4%.

Chief executive John Chambers stopped short of using one of the metaphoric expressions like ‘air pockets’ or ‘uncharted waters’ that he has used in the past to describe economic uncertainty, but he said repeatedly on the conference call discussing results that the economy is facing numerous ‘challenges.’ From our perspective, we wonder if Cisco will get its M&A machine humming again if it continues to stabilize its business.

The company announced a deal in each of the first three months of 2011, but has been notably absent since then. In other words, Cisco has been out of the market since it first let on that business was getting tougher. Will that change now that business appears to be picking up again?

Cisco shares are a flop for Flip’s owners

Brenon Daly

Contact: Brenon Daly

Since the purchase of Flip, Cisco Systems shares have been a flop. That’s actually an important consideration for the former owners of digital camera maker Pure Digital Technologies, which Cisco shuttered on Tuesday. Recall that when the networking giant (somewhat inexplicably) reached for Pure Digital two years ago, it covered the $590m purchase with its own equity. It was the first time Cisco had used its own equity as currency in four years, according to our records.

For the first year or so after the deal closed on May 21, 2009, Cisco basically tracked the S&P 500 Index. However, over the past half-year, Cisco stock has slumped as it has failed to execute, as the company indicated in a recently leaked memo from CEO John Chambers. Those acknowledged missteps have left Flip’s backers (at least the ones who haven’t sold) underwater on their holdings. Since the deal closed, Cisco stock has dropped 10% while the S&P 500 has tacked on 50%.

2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

Reading Cisco’s signals

Brenon Daly

Contact: Brenon Daly

As a bellwether for the tech industry, Cisco Systems laid out a fairly bearish outlook for Wall Street in its report on fiscal first-quarter results. The projections of lower-than-expected revenue at the networking giant trimmed some $20bn from its market value Thursday, and helped dragged down the Nasdaq, which has tacked on 6% over the past month. But from our perspective, Cisco is not just a key indicator for the equity market – it’s also a key indicator for the M&A market.

Looking more closely at the company’s fiscal Q1 report, we can’t help but be struck by Cisco’s paltry M&A spending. During the August-October period, the company handed over a total of just $69m (net of cash at acquired companies) for its purchases of ExtendMedia and Arch Rock. (Specific terms on both deals weren’t disclosed.)

While that may sound like a lot of money, it’s pocket change to Cisco, which generated $1.7bn in cash flow from operations in the quarter. Or more dramatically, consider this: during Q1, Cisco spent $2.5bn on share repurchases. That means it spent more than 35 times more on its own equity than on the equity of other companies.

Not that Cisco has been alone in staying out of the big-ticket M&A market recently. We noted that October (the final month of Cisco’s fiscal first quarter) was the first month of 2010 that a tech company didn’t announce a single transaction valued at more than $1bn. Obviously, that streak was broken last week, when Oracle said it was spending $1bn for Art Technology Group. Still, it was only Oracle’s second significant acquisition of the past 18 months.

Riverbed bolts onto Steelhead

Brenon Daly

Contact: Brenon Daly

Riverbed Technology just keeps flowing higher. Shares in the company, which hit the Nasdaq four years ago, notched their highest-ever close Wednesday. The market values the WAN traffic optimization (WTO) vendor at a staggering $4.2bn. That works out to some 7.7 times projected 2010 sales of $545m and some 6.2 times next year’s forecasted revenue of some $680m.

The company has garnered that rich valuation by selling its Steelhead appliances, which basically help customers move network traffic more quickly. Through M&A, Riverbed has added some smarts to its boxes. That expansion has been crucial for Riverbed because it is still basically a one-product shop, while its rivals (notably Cisco and Blue Coat Systems, but also Juniper Networks) pitch WTO wares as part of a larger network offering.

Most recently, the company picked up protocol analysis and packet-capture technology with its purchase of CACE Technologies. Although exact terms on the deal – only Riverbed’s second acquisition – weren’t revealed, the company did indicate that it paid less than $20m for CACE, which is perhaps best known for its Wireshark and WinPcap tools. (My colleague Steve Steinke has our full report on the purchase.) The deal comes a year and a half after Riverbed bought Mazu Networks, which added visibility and security technology through the startup’s network behavior anomaly detection offering.

HP buys big

Brenon Daly

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

Sailing around the market with Cisco

Brenon Daly

Contact: Brenon Daly

There are a lot of ways to chart the pickup in M&A activity over the course of 2009. In our recently published M&A Outlook, we cover a lot of the empirical indications, including the fact that spending on deals in the second half of 2009 is tracking 50% higher than in the first half of the year, as well as that the median valuation for fourth-quarter transactions is the highest we’ve seen in the year since the credit crisis erupted.

But our favorite way to encapsulate the changes between the climate a year ago and right now isn’t through data but through anecdote. (Of course, there are those who joke that ‘data’ is just the plural of ‘anecdote.’) Last year, we recall Cisco Systems’ CEO John Chambers ominously remarking that the economy was in ‘uncharted waters.’ Cisco is often considered a bellwether for the broader tech industry, and the company has been a particularly active shopper. Over the past five years, Cisco has spent more than $20bn to buy its way into new markets.

Not that Cisco – or any other company, for that matter – was doing much of that in early 2009. Since then, however, the waters have gotten more navigable. That certainty has helped Cisco step back in the market, with a pair of $3bn transactions as well as its $183m pickup of on-demand security firm ScanSafe. We suspect that signals like that may well encourage other corporate buyers to perhaps at least revisit some of the deals that were put on pause earlier this year. Merely working through that backlog could get M&A off to a strong start in 2010.

A thaw in the market

Brenon Daly

Contact: Brenon Daly

In recent weeks, there’s been a lot of talk about a thaw in the once-frozen M&A market. While that’s true for overall activity, it’s also turning out to be true for specific deals that for one reason or another found themselves on ice at some point. Whether the transaction originally froze because of financing, regulation or pricing, a few of the notable deals are now looking like they’ll get done. That warming trend in dealmaking stands in sharp contrast to the climate at the beginning of the year. The Ice Age that spanned the first few months of 2009 is the main reason why total M&A spending for this year is likely to come in at just half the level it was in 2008.

Among the transactions that have been reheated in recent weeks: JDA Software’s consolidation play for i2, the sale of once-hot-but-now-cold 3Com and Cisco Systems warming up to the shareholders of Tandberg, who had given the networking giant a Nordic brush-off in its first bid for the videoconferencing company. (Incidentally, the additional $400m that Cisco will kick in for Tandberg will deplete its overseas cash stash by a whopping 1.3%.) What’s interesting in this trio of deals is that all of them involve the target company pocketing more money than was offered in an earlier proposed transaction. That’s certainly a change in the climate from this time last year, when we were writing about bidders ‘recalibrating’ their offers lower.

Profiting from the battle for the datacenter

Brenon Daly

Contact: Brenon Daly

Although the battle between Hewlett-Packard and Cisco Systems over outfitting datacenters is still playing out, some winners have already emerged. First and foremost, the shareholders of 3Com have benefitted tremendously from the turf war between the two tech titans. On Wednesday, HP said it is picking up 3Com for $3.1bn, bolstering its ProCurve lineup with 3Com’s switches and routers, which are Cisco’s core products.

Terms call for HP to hand over $7.90 in cash for each share of 3Com. That’s roughly 50% higher than 3Com shares garnered in an unsuccessful buyout two years ago and nearly four times the price of 3Com stock just one year ago. Additionally, it means that anyone who bought shares in 3Com over the past half-decade will be above water on their holdings when the sale to HP closes in the first half of next year. We can’t say that we’ve seen many situations like that in recent transactions. In most cases this year, the sale prices of public companies – particularly those that have faded in recent years, like 3Com – have been below the market prices they fetched back in 2007. And that was before any takeout premium.

But there are other parties that stand to come out ahead in the HP-3Com deal, as well. We have to imagine that the bankers at Goldman Sachs are glad (if not relieved) to have their client, 3Com, looking likely to have finally been sold. Goldman was advising the networking vendor back in 2007 on its proposed sale to Bain Capital and Huawei Technologies, which dragged on for a half-year before being scuttled due to national security concerns. There are success fees and then there are well-earned success fees.

Meanwhile, on the other side of the desk, Morgan Stanley also has reason to celebrate its work with HP. Not only is the pending purchase of 3Com the largest enterprise networking transaction since mid-2007, but the deal continues a strong recent run by Morgan Stanley. This week alone, the bank advised HP on its $3.1bn purchase of 3Com, AdMob on its $750m sale to Google and Logitech on its $405m acquisition of LifeSize Communications. Altogether, that means Morgan Stanley has had a hand in three of the four largest deals this week.

Nordic freeze-out for Cisco

Brenon Daly

Contact: Brenon Daly

With a fat treasury and well-drilled deal team, Cisco Systems typically storms through acquisitions. Over the past five years, the networking giant has announced some 50 purchases, including more than a few that combined big money and quick moves. (For instance, several sources have indicated that Cisco snatched WebEx Communications away from IBM in just a week, after Big Blue had the online conferencing company all but locked up.) But it appears that something in Cisco’s M&A methods has been lost in translation in its reach across the Atlantic for Norway’s Tandberg.

A little over a month ago, Cisco announced plans to hand over $3bn in cash for Tandberg, as a way to bolster its videoconferencing lineup. Although Tandberg’s board of directors backed the offer, a fair number of shareholders have balked at what they see as Cisco’s low-ball bid. Critics point to the fact that Cisco’s all-cash offer values Tandberg just 11% higher than the company’s closing stock price the day before the announcement. (We noted recently that the premium was just half the amount that Cisco is paying for Starent Networks, which was announced a week after Tandberg.)

Further complicating Cisco’s play for Tandberg is the fact that 90% of shareholders at the Norwegian company have to agree to the deal. Already, holders of about one-quarter of Tandberg equity have said they won’t support Cisco’s proposed purchase – at least not at its current valuation. We suspect that Cisco may well end up having to reach a bit deeper to land Tandberg. (The company gave itself more time on Monday, bumping back the expiration of its tender offer for Tandberg until November 18.) And as the standoff drags on, other vendors are closing their own videoconferencing deals. On Wednesday, Logitech said it will spend $405m in cash for LifeSize Communications. Logitech’s bid values LifeSize at slightly more than 4x trailing sales, which is not out of line with Cisco’s bid for Tandberg of 3.6x trailing sales.

It wouldn’t be surprising to see Cisco top its existing offer for what’s undoubtedly a valuable asset. Tandberg would give Cisco a solid mid-level videoconferencing offering, slotting nicely between its high-end Telepresence product and the low-level Web conferencing and collaboration offering it got when it picked up WebEx. In terms of markets, adding Tandberg would significantly expand Cisco’s reach in Europe, particularly with government customers. And as a bonus, securing Tandberg would prevent the target from landing with rival Hewlett-Packard, which has its own videoconferencing wares. (Although HP actually beat Cisco to market with its Halo product, it has little to show for its early advantage.) We doubt that would happen, but wouldn’t it be a kicker if HP pulled a Cisco on Cisco, quickly firing off a topping bid and walking away with Tandberg?