Update Cisco Systems (CSCO)

10/01/2009 1:26 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

On October 1 Cisco Systems (CSCO) announced an offer to buy video conferencing leader Tandberg for $3 billion in cash. This is exactly the kind of new economy deal-making that drove me to add Cisco Systems to Jubak’s Picks on September 25.

The deal, which has been recommended by Tandberg’s board, will extend Cisco’s current video conferencing product line, heavily weighted toward high-end “telepresence” systems that sell for $150,000 to $200,000, into the larger conference room and desktop video conferencing market. The high-end telepresence market is about $500 million annually but the video conferencing market is about $3.5 billion, according to technology market watcher Gartner. The video conferencing market is growing by about 18% a year, Gartner estimates.

The deal will also bring Cisco network-based switching technology that will make it possible for videoconferencing systems made by different companies to work alongside each other. That technology and the buy itself will increase competition in this space between Cisco and Microsoft (MSFT).

Tandberg is Polycom’s (PLCM) biggest competitor and Wall Street analysts speculate the deal will push Polycom into greater cooperation with Hewlett-Packard (HPQ), which moved from a Cisco partner to a Cisco competitor when Cisco decided recently to enter the server market.  

The acquisition would be Cisco’s largest since the $3.2 billion cash buy of Webex, another online collaboration company. The price seems reasonable at an 11% premium to Tandberg’s most recent closing price and a premium of 25% to the average price over the last 90 days.

In addition, since Tandberg is a Norwegian company, the deal will let Cisco use some of the cash that it now has outside of the United States that it can’t repatriate without paying tax penalties. Cisco’s total cash before the deal came to $34 billion.

In an October 1 conference call Cisco told analysts that it expects the deal to close in the first half of 2010 and for it to begin adding to earnings in the fiscal 2011 year that begins in August 2010.

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