Cisco makes big bet on Web conferencing

Why Cisco Systems is shelling out $3.2 billion for the No. 1 Web-conferencing service provider.

Cisco Systems is spending billions to prove it can do more than sell routers.

On Thursday it announced it would spend $3.2 billion in cash to acquire WebEx, the No. 1 Web conferencing company.

The WebEx acquisition is part of a much larger strategy. With roughly 70 to 90 percent market share in its core businesses of switching and routing, Cisco needs to find new markets for growth. And while the company may say there is still lots of money to be made from upgrading infrastructure at large companies, Wall Street investors need to see Cisco making aggressive moves to spur future growth.

"(CEO) John Chambers does not want to leave Cisco a $25-a-share company," said Zeus Kerravala, an analyst with Yankee Group.

This quest for growth has been the impetus behind several Cisco acquisitions, both large and small, over the past few years. It's why Cisco is moving into markets such as consumer electronics and even social networking and online entertainment.

"This acquisition speaks to Cisco's willingness to pay a premium for companies that allow it to enter a new market and hit the ground running."
--Chris Silva, analyst, Forrester Research

In February it bought Five Across, an 11-person company based in San Francisco that has developed software that allows large companies to easily add social-networking features to their Web sites without needing to hire a team of engineers. Using this tool, companies will be able to create communities in which users can share audio, video and photos, as well as post blogs, podcasts and profiles. And earlier this month Cisco bought , the operator of the social-networking site Tribe.net.

"For the past 20 years, we have been on a mission to make networking and communications products that change people's lives," said Charles Giancarlo, Cisco's chief development officer. "When you have the same mission statement for that long, it's not a fad. We really believe that we are changing the world."

A decade ago, Cisco wouldn't have even considered buying WebEx, a 2,200-person, publicly traded company with $380 million in yearly revenue. For most of its existence Cisco has focused on buying small start-ups just before they are ready to bring their technology to market.

Bigger fish, established markets
But in the last few years Cisco has adapted its acquisition tactics to also include purchasing large, name-brand companies that already have significant market share, even though finding start-ups with cutting-edge technology is still at the heart of Cisco's acquisition strategy. In 2003, it bought home-networking leader Linksys for $500 million to kick off its own retail brand in that category. Last year, Cisco spent $6.9 billion on Scientific-Atlanta to build out its video and cable offering.

"Our preference, if we are going to acquire, is to buy a smaller company," Giancarlo said. "But if we feel we can digest a larger company and the technology and everything else fits, then that's what we will do."

With a total of 119 announced acquisitions since 1993 under its belt, there is no question Cisco knows how to make acquisitions work. And now the successes of its Linksys and Scientific-Atlanta purchases have likely given Cisco's management team the confidence to spend even more money to grow the company's revenue, not just with cool new technology from start-ups, but also with real products that already garner substantial market share from established, publicly traded companies.

"This acquisition speaks to Cisco's willingness to pay a premium for companies that allow it to enter a new market and hit the ground running," said Chris Silva, an analyst with Forrester Research. "They seem much more willing to bring on mature companies to help them grow, which is a bit of a departure from their traditional strategy of picking up smaller companies."

Indeed, Cisco had other options in the Web conferencing market. The company could have easily bought a smaller start-up for a fraction of the WebEx price. But then it would have had to battle three well-established players--WebEx, Microsoft and Citrix Systems--to gain significant market share.

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