Download; Above the fray

Download; Above the fray – Company Business and Marketing

Vincent Ryan

Cisco continues buying in tight market It’s good to be Cisco Systems. While rivals Lucent Technologies and Nortel Networks tuck their tails between their legs and run for cover from investors, Cisco trots along with its nose in the air.

Despite shedding more than $100 billion off its $400 billion-plus market valuation since Sept. 1, the vendor has continued to pursue acquisitions. In the past month and a half, Cisco spent $1.1 billion to bolster its product portfolio, giving it 22 deals for the year. Most buys were in software, which increasingly drives sales of Cisco’s routers and switches.

“Cisco is clearly more and more about software that enables new services on the all-IP infrastructure,” said George Peabody, vice president at The Aberdeen Group. “IP convergence is starting to accelerate, and carriers that have bought into the all-IP [network] are starting to lay the infrastructure in pieces.”

Analysts see no letup in Cisco M&A activity and cite optical systems for the metro and access markets as a likely area for more takeovers. Rumors of a Cisco-Ciena hookup circulated on Wall Street last week, but such a deal would be expensive at current prices: Ciena boasts a $28 billion market cap and a stock that trades at more than 400 times trailing 12-month earnings. But if the price-earnings ratios of optical vendors start to shrink, as some analysts predict, Ciena could look more digestible.

This is not to say Cisco has been immune to the downturn in the equities markets. Cisco’s shares are off almost 30% since mid-July. But the vendor’s market valuation is still in the $350 billion range and its stock still trades at a healthy premium to earnings.

“Everyone’s valuation is down, but Cisco has a market cap two times as large as its biggest competitor, so it can pay more for acquisitions,” said Michael Neiberg, analyst at Chase H&Q.

Acquisitions, of course, are the cornerstone of Cisco’s new product development. They’re also a means for Cisco to gain motivated employees with experience in the service provider business, said Jim Lawrence, program director at Stratecast Partners.

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