Cisco is offering approximately US$3 billion for Tandberg stock, an 11 per cent premium on the latest trading price and a three times multiple of revenues. If the deal is completed, Tandbergs current CEO will head up the groups worldwide telepresence business he will be responsible for two-thirds of the telepresence estate in enterprise global services.
We think this is a smart deal for Cisco. Tandberg has the full toy box for videoconferencing systems. And while Cisco has made a big noise with Cisco TelePresence since it launched in 2006, videoconferencing is much more than big-screen suites which make up only 25 per cent of the market.
Question marks over Ciscos services strategy
Strategically, the big question is where the services are. If theres something unexciting about this deal it is because it is a bit of classic box-buying and not a services acquisition. All of Ciscos product development news is around service architectures and service support, and this isnt. Services account for 16% of Tandbergs revenues, and while Cisco CEO John Chambers purred at the near-50% service attachment rate in telepresence, thats only at the top end of business video communications. Also, for fellow CEO Fredrik Halvorsen, service attachment is probably a new term; for him service is something thats included in the package.
The two will need to sort out whats important here more box-shifting, or an earth-moving shift to service packages on video.
Tandberg is ahead of the curve on the server side with multimedia content software, so maybe Cisco can profit from that in its own infrastructure products. Otherwise, Tandberg is 60 per cent endpoints (screens), which just suggests a big headache on branding, price points and channel management.
The financials are unexciting. Tandbergs gross margin is already 66.1 per cent against Ciscos 64.1 per cent, so the integration wizards at Cisco wont be busy. This is not like the Scientific Atlanta deal which diluted Ciscos gross margin to less than 50 per cent at a stroke a situation Cisco turned around within two quarters. However, Tandberg people will be pleased with the price tag. And enterprises have the mouth-watering prospect of boardroom to desktop business video if Cisco and Tandberg can act together quickly.
Business video is the standout service for straitened times
We have found videoconferencing to be the most resilient of all communications technologies through the downturn. The requirement for inter-company conferencing is increasing as companies federate more with partners and suppliers, and that is helping to drive a second wave of deployment of telepresence networks with 100 or more sites compared with the typical 530 sites we have seen so far. This looks like a rapid-growth market right now, and we expect revenues from equipment and services will reach $892 million in 2011 before tailing off as the global MNC rush to deploy loses pace.
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