Rumors are circulating that Cisco may bid for Nortel.
Cisco CEO John Chambers fired up rumors of a potential acquisition of Nortel last week when he told an audience in Toronto that he would love to have Nortel as a partner. I believe going to market together is the way of the future, he insisted. But he was cool on the idea of a bid. I don’t know how to do large acquisitions, adding: Never say never.
It is true that Cisco avoids major acquisitions. It is a hugely focused company, that targets technologies it believes will make lots of money and then tends to buy start-ups that will give it the IP it needs. Its current target list, according to its SEC filings, are IP telephony, security, optical networking, storage area networking, wireless technology, and home networking. However, a joint venture with Nortel would seem unlikely because the two companies are ferocious competitors.
Nortel’s base remained with the world’s major carriers and as they clamped down on spending its revenue plunged from $30.3 billion in 2000 to $9.8 billion in 2003, though the latter figure is still subject to revision.
Cisco too has suffered during the lean years but its decline was more gentle, with revenue down from $22.3 billion in 2001 to $18.9 billion in the year to July 31, 2003. It is however staging a strong recovery and its last quarter to May 4, net income was 22.7% higher at $1.2 billion on revenue that increased 21.7% to $5.6 billion.
As a result, Cisco has a far higher stock market rating than Nortel, with a market value of about $158 billion, 8.3 times revenue while Nortel is worth just $18.4 billion, 1.89 times last year’s revenue. By taking over Nortel, Cisco could hoist revenue by about 50% for a modest dilution in its stock.
