Cisco today announced a $3-billion all-cash acquisition of Tandberg, a major player in enterprise videoconferencing systems.
The acquisition makes good strategic sense for Cisco, giving it a range of cost-effective videoconferencing systems — scaling upward from the desktop all the way to telepresence kit — and video-management capabilities to fill out a product portfolio that was top heavy with high-end, room-based telepresence offerings.
Although initial concern was expressed regarding geographic and time differences between San Jose and Oslo, Cisco is confident that the corporate cultures are simpatico. John Chambers even called Tandberg a “Silicon Valley company in Norway.”
Cisco is paying an attractive price for Tandberg, just 11 percent above Tandberg’s closing share price yesterday. Even though Tandberg’s board of directors is pushing for the transaction to be approved, the acquisition won’t close immediately, giving others a chance to outbid Cisco.
Mentioned as potential Tandberg suitors are HP, Sony, IBM, Siemens, and Juniper. Realistically, though, only HP now has the means and motivation to give Cisco a run for its money. The other companies have other strategic priorities or are preoccupied with cost-cutting and restructuring.
Given the relatively low price Cisco is paying for an asset that will make it a dominant player in videoconferencing systems and telepresence, I would not be surprised if Cisco’s plans are disrupted by a shareholder revolt along the lines of the one that met Google’s acquisition bid for On2 Technologies. In fact, Tandberg’s board might have questions to answer regarding the timing and price of the sale.
Tandberg CEO Fredrik Halvorsen said the following:
“We believe that Cisco, with its breadth of expertise and proven track record of integrating acquisitions will be a strong owner of Tandberg’s business. Cisco’s ownership will strengthen Tandberg’s position to serve our customers and partners with even greater innovation, and to expand opportunities for our employees.”
Some shareholders might demand a stronger justification.
Meanwhile, Polycom, which competes against Tandberg and Cisco, isn’t happy about the deal. Polycom is alleging that the acquisition will reduce competition, limit customer choices, and imperil work on industry standards for video-based communication and management.
Wrote Stefan Karapetkov, director of emerging technologies at Polycom:
Cisco announced today that they will acquire Tandberg, and this will have significant impact on the video communications market. It will reduce competition, and limit customers’ choices, especially in the telepresence space. It will hurt Radvision who now fills the gap in Cisco’s video infrastructure portfolio.
I am however more concerned about the standards-compliance that have been the pillar of the video communication industry for years. Tandberg and Polycom worked together in international standardization bodies such as ITU-T and in industry consortiums such as IMTC to define standard mechanisms for video systems to communicate.
Cisco on the other hand is less interested in standards, and considers proprietary extensions as a way to gain competitive advantage. The concern of the video communication industry right now should be that the combined company will be so heavily dominated by Cisco that standards will become last priority, far after integrating Tandberg products with Cisco Call Manager and WebEx.
Telling is the fact that both Tandberg and Cisco declined participating in interoperability events over the last few months.
The vehemence of Polycom’s reaction suggests that Cisco has made an adept move likely to pay rich dividends.
Despite Pollyannaish optimism about a fabled recovery, most wise souls realize torpid growth and rigorous cost controls will be with us for a while. While Cisco is right about how enterprise utilization of video technologies can reduce corporate travel budgets, Cisco’s high-end telepresence solutions are prohibitively expensive for the vast majority of businesses, even for many large enterprises.
Meanwhile, John Chambers and his team noticed that Tandberg’s video systems are installed at many Cisco accounts. Tandberg offers videoconferencing products that customers can afford and justify during a prolonged period of lean corporate budgets.
According to a Reuters report, Tandberg sells about 15,000-16,000 of its regular videoconferencing units every quarter for about $7,500 each, while Cisco has sold fewer than 10,000 in total of its TelePresence systems, which cost about $250,000.
In the big picture, it is in Cisco’s strategic interest for video-based communication to be adopted broadly and quickly. Video uses more bandwidth and requires more control and management than data or voice traffic. The more video that is consumed, the more that service providers, enterprises, and consumers will need upgrades to networking gear.
Tandberg has considerable strategic value to Cisco. Let’s see whether HP, increasingly becoming a chief rival to Cisco, chooses to fight them for it.