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2HRS2GO: IPO market dictated Cisco&#039s cost for Cerent

Those rotten IPO investors.

I wouldn't be surprised if that was the first thought occurring to Cisco CEO John Chambers as he considered the acquisitions of Cerent Corp. and Monterey Networks Inc. The deal will cost 107.3 million shares of Cisco.

Perhaps it takes a creative mind to pay $6.9 billion for a company (Cerent) that saw little more than one tenth of one percent of that in first half 1999 revenue. Maybe it takes flexible accounting theories to put a $500 million value a company (Monterey) with no paying customers.

Or maybe it just takes crazy stock buyers. Anything related to next generation networking catches the market's attention these days, judging by Renaissance Capital's Hot IPOs list, whose top 16 performers includes eight companies specializing in some type of networking. Such market sentiment dictated the terms of acquisition for Cisco.



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A generic term like "networking" covers several unrelated fields: equipment for ISPs and communications companies (Redback Networks and Juniper Networks); switches for internal corporate networks (Extreme Networks); software and hardware for data storage (Brocade Communications, Gadzoox Networks); managing Internet servers (F5 Networks); and DSL service providers (Copper Mountain Networks, Covad Communications). Each of those companies went public recently; each has at least quadrupled in value. Cisco competitors Redback and Juniper have risen more than 1000 percent and 550 percent respectively.

Pressure from the Redbacks and Junipers of the world helped force Cisco's hand. Cisco has long wanted to use its domination of data routers to establish a similar position in an world where voice and data traffic are carried on the same equipment; but until recently, the urgency wasn't there.

Voice equipment kings Lucent, Nortel and Tellabs now are making moves of their own, with each pushing a high profile convergence strategy. At the same time, upstarts like Redback and Juniper are encroaching on Cisco's core field.

Cisco is going to lose some market share in that data router business because Redback and Juniper have better technology. In the meantime, Cisco needs to strike while its position remains strong, and before Lucent and the rest gain a convergence foothold. Cerent's optical networking box sits right in everyone's target area, where packet networks meet circuit-based ones. Monterey's technology boosts capacity on optical networks.

So Chambers agreed to buy a pair of fledglings, where once he might have waited until they actually produced real revenue. Fortunately for Cisco, a stock swap acquisition exceeding $7 billion means little for shareholders of a company with a market cap of $220 billion.

Some observers point out that Cisco's acquisitions in recent years have produced little in the way of measurable results. If you believe Cisco, today's announcement drops the piece into place that will jumpstart its covergence dreams.

The company claim to foresee a $100 million run rate for Cerent, which isn't implausible given Cisco's large and extremely effective sales force. Yet for $6.9 billion, I'd want to see a lot more than $100 million in revenue, especially considering Cerent's market is expected to reach $10 billion in a few years.

Fortunately for Cisco, the Lucents and Nortels of the world aren't exactly nimble on their feet. But if Cisco wants to make the most out of today's $7 billion gamble, it'll have to speed up its own pace.

Other issues:

  • Advanced Fibre Communications Inc.
  • (Nasdaq: AFCI) Wall Street didn't waste any time picking ancillary winners in the Cisco purchases of privately-held Cerent Corp. and Monterey Networks. Advanced Fibre's Cerent stake yields 5.5 million Cisco shares, collectively worth more than $380 million, which could fuel some acquisitions for Advanced Fibre itself.

  • Intuit Inc.
  • (Nasdaq: INTU) The financial software vendor reports fourth quarter results after the bell today. First Call's survey of six analysts predicts a loss of 33 cents a share for the July quarter, which typically sees a letdown since it follows tax reporting season.

    Broad indices turned lower in the afternoon. The Nasdaq Composite Index was down 15.08 to 2790.52, the S&P 500 lower by 13.58 to 1368.21, and the Dow Jones Industrial Average off 88.33 to 11237.71. 22GO>