Cisco Systems said it will buy online videoconferencing company WebEx Communicationsfor $2.9 billion as part of a strategy to sell comprehensive packages of communication products.
The deal, worth $3.2 billion including WebEx's existing cash, would be Cisco's biggest acquisition since the network equipment maker bought cable set-top box maker Scientific-Atlanta for $7 billion last year.
Cisco said on Thursday it will launch a cash tender offer for all outstanding WebEx shares at $57 each, a premium of 23% over their Nasdaq close of $46.20 on Wednesday.
The price was a lot higher than what Cisco would likely have paid if it bid for WebEx last year; WebEx shares have risen about 30% this year on good results. Even so, analysts said the deal was reasonable.
"WebEx is the market leader so you can always look to the market leader for valuation. It was a fair amount to pay," said Kenneth Muth, analyst at Robert W. Baird & Co.
"It will give Cisco the ability to sell their customers more and richer applications that will merge audio, video and desktop collaboration," Muth said.
Cisco's move highlights its expansion from its main business of making routers, which direct Internet traffic, to an increasing focus on "unified communications" that bundle mobile, Internet and other services into a single system.
WebEx has transformed videoconferencing, traditionally an awkward mix of software and hardware that allowed office workers to hold remote meetings, into an online service that allows anyone connected to the Web to hold secure conference calls.
Prudential analyst Inder Singh said WebEx's strength in the small-to-medium business market would help Cisco expand its customer base of large companies, including cable and phone carriers.
"Cisco is already ubiquitous in large enterprises, and it has been working to develop a similar, or larger, presence in SMB as well," Singh said in a research note.
Standard & Poor's analyst Ari Bensinger, who has a hold rating on Cisco with a $29-a-share price target, said the WebEx deal price made sense.
"We view the price, roughly eight times 2006 sales, as reasonable, given the strong growth prospects we see for video conferencing," he said.
Open to Bigger Deals
Cisco has been working on Web conferencing services and launched a high-end video conference product, TelePresence, late last year. Chief Development Officer Charles Giancarlo told a conference call that WebEx's technology would bolster Cisco's unified communications product line.
Cisco has announced a series of small acquisitions this year of niche technology companies. WebEx showed Cisco was open to bigger deals, and Giancarlo said there may be more.
"WebEx looks like a large acquisition, but it's less than 2% of our revenue and market cap," he told Reuters in an interview. "So I think that we will start to see more of these."
The deal has been approved by the board of directors of both companies and is expected to close during Cisco's fourth quarter, which ends in late July.
Cisco said it expects the deal not to impact 2008 full-year earnings before special items and it might slightly add to earnings in 2009.
Giancarlo also said the integration of WebEx would take one to two years, longer than many Cisco's smaller deals. "We are going to go through an extended process of careful integration. We want to be thoughtful," he said.
WebEx Chief Executive Subrah Iyar will report to Giancarlo once the transaction is completed.