Cisco serves up $3.2 billion to buy WebEx

The deal gives the networking giant WebEx's software and hosted service, which help to foster on-demand collaboration between companies.

Cisco Systems plans to spend $3.2 billion to buy online conferencing company WebEx, the companies said Thursday.

The WebEx software and hosted service, which allows for on-demand collaboration between businesses, will find a home in Cisco's Unified Communications product portfolio.

Cisco executives said during a conference call that the WebEx service is a key product for small and medium-size businesses. The networking giant already offers some collaboration tools, but it does not offer a hosted service such as WebEx's. With a hosted service, businesses can use collaboration tools but do not need to buy the expensive software and hardware required to host on their own network.

"WebEx was one of the early leaders in the market for making network-based technology," said Charles Giancarlo, chief development officer for Cisco. "And it's a natural extension for Cisco's Unified Communication products to give users inside and outside the workplace a way to work and collaborate."

Cisco still generates the bulk of its revenue from sales and servicing of routers and switches that shuttle Internet Protocol packets across corporate networks and the Web. But the company has been pursuing several new markets, such as telephony and video, over the past few years to generate growth. So far, Unified Communications is proving to be a big winner. During the company's second-quarter earnings call in February, executives said that sales of products in that family had increased 38 percent compared with a year ago.

Cisco's biggest competitor in this market also happens to be its most important partner, Microsoft. Even though Cisco and Microsoft have been independently developing and adding new capabilities to their product lines, Cisco has also been integrating its Unified Communications software into Microsoft applications.

Still, there is a sense that the companies are continually playing catch-up with one another. Earlier this month, Microsoft announced it was finally adding voice capabilities to its Live Communication Server. And now Cisco is adding hosted collaboration to compete with Microsoft's hosted service known as Live Meeting.

"I think it's huge for Cisco," said Zeus Kerravala, an analyst with Yankee Group. "Microsoft has stolen much of the thunder from Cisco of late in unified communications. And it's fair to say that Cisco was lagging here. Microsoft bought PlaceWare and Citrix bought Expertcity years ago. So online, real-time communications has been a part of other companies visions for a while."

Indeed, Microsoft announced its acquisition of a Web conferencing company called PlaceWare in January 2003. The product later became known as Live Meeting. It also became the foundation for Microsoft's Live Communication Server, which competes directly with Cisco's unified communications products. Citrix Systems also got into the market in December 2003, when it announced the $225 million acquisition of Expertcity.

The WebEx software and service is another indication that Cisco is serious about serving small and midsize businesses as well as large companies. The company began aggressively addressing this market a few years ago. In addition to its home-networking brand, Linksys, the company has also introduced scaled-down versions of its popular enterprise gear to sell to smaller businesses. It has also grown its sales channel and introduced new products specially designed for this market.

The WebEx acquisition is expected to close in Cisco's fiscal fourth quarter 2007, which ends in July. WebEx will then become a part of Cisco's Development Organization while maintaining its service-based business model. Subrah Iyar, CEO of WebEx, will remain with the company. He will report directly to Giancarlo.

WebEx was founded in 1995 and held its initial public offering in July 2000. The company, which has almost 2,200 employees, reported revenue of $380 million for 2006.

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