Under terms of the deal, San Jose, Calif.-based Cisco and Cap Gemini will form a new subsidiary company focused on network design and consulting, consisting of 4,600 existing employees from the services firm. Cisco will own 4.9 percent of the venture and Cap Gemini will own a 95.1 percent stake. Cisco, the leader in data networking equipment, has an option to buy 100 percent of the remaining shares in the event of a third-party takeover of Cap Gemini.
The new subsidiary will focus on network design and consulting services for telecommunications companies. The companies said the venture will be significantly focused on Europe but will extend to the United States and Asia. Cap Gemini will "lead" with Cisco equipment in markets where the networking firm leads, such as Internet routing, under terms of the deal.
The Cisco agreement is the second major deal for Cap Gemini in as many weeks. Last week, Ernst & Young agreed to sell its consulting unit to Cap Gemini for roughly $11 billion in cash and stock. Under the agreement, Cap Gemini plans to fold Ernst & Young's consulting business of about 18,000 consultants into its global computer services business.
Cisco's move is indicative of the networking giant's strategy to use third-party companies in areas where it does not want to develop its own organization internally. Those areas are generally in parts of the technology market that do not result in lucrative sales margins, like labor-intensive services and consulting.
Conversely, two of Cisco's primary competitors, Lucent Technologies and Nortel Networks, have vast service and consulting organizations. Cisco believes it can better compete in the market by leaving services opportunities to others, while the likes of Lucent and Nortel say their approach makes it simpler for their customers.
The end result is a high-stakes strategy for all parties. In August of last year, Cisco and Lucent each made plays for armies of services professionals on successive days.
Cisco made a $1 billion investment in technology consultants KPMG, a move that was followed the next day by Lucent's $3.7 billion acquisition of International Network Services (INS), a company previously aligned with Cisco. Cisco owned a 7.8 percent stake in INS prior to the sale to Lucent.
The company subsequently gained IBM's services organization as an ally in a wide-ranging partnership agreement. Cisco also has high-profile partnerships with Hewlett-Packard and Motorola that include a service component.
Cisco says that for every $1 it sells in networking technology, there is $2.50 in revenue for third-party software integrators and consultants to pocket, according to Don Listwin, the company's executive vice president. Cisco often refers to this as an "ecosystem" approach.
Of Cisco's $835 million investment, $164 million is earmarked for the new venture with Cap Gemini, with the rest consisting of a $671 million investment in the consulting firm. Listwin said the split was due primarily to the regulatory environment in Europe, with the expectation that most of the investment will focus on the new subsidiary.
"The No. 1 issue here is that we want to build this Internet ecosystem here with partners," Listwin said.
The subsidiary firm will be officially formed and operational today, according to Listwin, though the ownership structure will likely be approved by the summer. It will be headed by Alexandre Haeffner, chairman of Cap Gemini's telecom and media unit.
The venture will have a board comprised of five members from Cap Gemini and one member from Cisco.