Thursday, October 1, 2009

Cisco to acquire Tandberg. Good use of cash (CSCO, TAA.OL)



AlphaNinja - Cisco Systems (CSCO) announced this morning that the board of Norwegian video communications firm Tandberg unanimously agreed to a $3billion cash offer from the San Jose networking giant.

From Tandberg's annual report:
Because we believe everyone is entitled to business-quality video, we reinvented the desk phone. By adding video to the IP phone we significantly advanced our vision for unified communications. We also introduced a new suite of TANDBERG-certified services which simplify implementation, maintenance and monitoring of video solutions. Combining network-centric personal video solutions with a host of services enables organizations to easily scale video to every desktop, changing the way people communicate.

While the industry is not immune to economic turbulence, telepresence and video conferencing solutions address business leaders’ needs to manage costs by reducing travel, while increasing the level of collaboration. Within the video market, TANDBERG is able to maintain its performance by providing the best-in-class solutions with high quality, scalability, and interoperability.

Based on Tandberg's financials, it looks like Cisco paid 3.7times sales -->> actually a little pricier than Cisco's own valuation of 3.77 times sales if you back out Cisco's huge cash balance. Speaking of which, this deal uses only 1/10th of Cisco's cash hoard, which is earning little in the way of interest. The deal amounts to about 21times trailing earnings, but that's before costs are taken out. Tandberg's cost structure is a little more bloated than Cisco's, as you might gather by the line item "Salaries and Social Costs," but their 66% gross margins are actually 200basis points higher than Cisco's. This looks like a great deal. The market is sending Cisco shares down a percent, but that's amid a broad market selloff.
My one concern -->> why all cash? A portion of the deal done in a stock offer might have incented Tandberg employees to stick around...


(Disclosure - Long Cisco)

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