At the bazaar of high-tech companies, Cisco Systems Inc. is a compulsive shopper. Twice on the same day in early April, $12 billion Cisco bought companies involved with technologies that facilitate voice traffic over data networks. The price: $445 million for the pair. Five days later, Cisco paid $2 billion in stock for GeoTel Communications Corp., in Lowell, Massachusetts, which makes voice call- center software. In less than a year, Cisco has now made eight deals for cutting-edge telecom technology shops.
Rampaging through the same marketplace is Lucent Technologies Inc. In June, the $30 billion provider of communications gear completed its $24 billion acquisition of Alameda, California-based Ascend Communications, a leading supplier of data- networking equipment to the telecom industry and to Internet service firms. It was the 23rd purchase that Lucent has made since being spun off from AT&T in 1996. The next day came announcement of yet another: Nexabit Networks, a maker of high-speed data-routing technology, in Marlborough, Massachusetts. Then, this August, Lucent agreed to pay $3.7 billion in stock for International Network Services Inc. (INS), a Sunnyvale, California, network designer that Cisco had long had in its own sights.
Cisco and Lucent have their origins in decidedly different worlds. San Jose, California-based Cisco is the leading data- networking-equipment provider. Lucent, in Murray Hill, New Jersey, dominates the telecom- equipment arena. But through their acquisitions, the companies are rapidly converging – in a battle to become the leading provider in the crucial new “data-convergence” market. In some ways, their acquisition strategies are strangely similar. Along with Nortel Networks, Siemens AG, and others farther back in the race, Lucent and Cisco aim to provide high-capacity data networking gear to both incumbent and upstart telephone and Internet service providers.
Silicon Valley’s Currency
For its shopping spree, Cisco has moved quickly to scoop up and integrate young firms, choosing that path to “outsource” much of its critical research and development. But so, surprisingly, has Lucent – despite a rich ancestry of research innovation in its former AT&T incarnation.
In part, this is because buying the technology is simply faster. The approach is to “buy the product, buy the engineers, and get a faster time to market” – and let someone else foot the bill to take the initial development risk in the start-up phase, says Christin Flynn, a data-communications analyst with The Yankee Group, a Boston-based consulting firm. Another factor behind the buying frenzy, of course, is the accounting rules that allow generous upfront write-offs for acquired R&D. The anticipated demise of pooling-of-interest accounting will doubtless change the way companies do acquisitions.
A look at the aggressive acquisition strategies of Cisco and Lucent, each with market capitalization around $200 billion, offers insight into one of the major wars for primacy in the 21st-century communications market. In both cases, finance is part of an interdepartmental team. Cisco’s centralized Business Development Group reports to the chief technology officer, and thus straight up to CEO John Chambers. And at Lucent, where acquisition teams grow within each business unit, finance supplies assistance in an effort that works its way through a corporate strategy and development office that reports directly to CEO Richard McGinn.