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Cisco to acquire WebEx Communications

The deal for the online conferencing company would add to a tech buying binge this year.

March 16, 2007|Alex Pham | Times Staff Writer

The pace of technology deals continued to accelerate Thursday when Cisco Systems Inc. said it would snap up online conferencing company WebEx Communications Inc. for $3.2 billion in cash.

Cisco, the networking-gear maker that briefly became the world's most valuable company during the dot-com boom, is on a spending spree to branch into new markets. WebEx dominates two-thirds of the growing business for Web-based meetings.

The planned acquisition boosted the value of announced technology deals in the U.S. so far this year to $31.7 billion, up from $23.5 billion at this time last year, according to research firm Thomson Financial.

If the shopping spree continues as many analysts project, 2007 will top last year as the biggest for technology mergers since the height of the dot-com boom. Technology mergers and acquisitions could reach $120 billion this year, up from $109 billion last year, said Richard Peterson, director of capital markets at Thomson Financial in New York.

"Obviously, we're off to a good start this year," he said. "There are likely to be more big deals like this down the road."

That's still a far cry from the industry's peak in 2000, when deals totaled $357 billion. The tech sector collapsed the following year, and acquisitions sank to $77 billion.

This time around, Peterson said, the going rates for tech companies are more down-to-earth and less likely to lead to a high-tech bubble.

If approved by federal regulators, Cisco's purchase will rank among the top three largest deals so far this year.

U.S. regulators last month approved a proposal by Siemens to buy industrial design software company UGS Corp. for $3.5 billion. And Oracle Corp. this month said it would buy Hyperion Solutions for $3.3 billion in cash.

Fueling the buying binge is a surplus of capital from private equity investors, banks and companies whose coffers are flush from healthy profit growth across corporate America.

"There's just an unprecedented amount of cash floating around," said Ken Marlin, managing partner of Marlin & Associates.

WebEx's roster of 2.2 million customers, mostly small and medium-size businesses, was part of what attracted Cisco, said Ned Hooper, Cisco's vice president of corporate business development.

"The opportunities exist to radically increase our presence among small and medium businesses," Hooper said. "And WebEx is a leader in that market."

San Jose-based Cisco, which has long relied on acquisitions to increase its revenue, also wanted to tap the fast-growing market for hosting online meetings. WebEx lets users in remote locations talk and share documents and videos over the Internet.

That market has grown at a 20% to 30% clip for the last few years, reaching $500 million a year, said Zeus Kerravala, an analyst with Yankee Group in Boston. He said WebEx, with $380 million in revenue in 2006, controls two-thirds of that market. Microsoft Corp.'s Live Meeting has a 20% market share and Citrix Systems Inc. has less than 10%, he said.

"WebEx's strength is [its] ability to make communication and collaboration on the Internet easy," said Ari Bensinger, an analyst with Standard & Poor's Equity Research in New York. "It's a very attractive market."

He said WebEx would complement a Cisco business unit that sells equipment and services for Internet phone calls, videoconferencing and other communications methods.

The deal for Santa Clara, Calif.-based WebEx would be Cisco's 119th purchase since its founding in 1984 and its fifth acquisition announcement this year.

WebEx Chief Executive Subrah S. Iyar said the company had been courted by private equity and enterprise software companies last year, but Cisco swept in about 10 days ago and completed the deal.

"They were able to be much more aggressive," he said.

Cisco funds most of its acquisitions from cash accumulated from a surge in demand for its networking communications equipment. Large businesses and telecommunications companies have been frantically upgrading their networks to handle the increased traffic in video, voice and data being sent over the Internet, Bensinger said. As of January, Cisco had $20.7 billion in cash and investments.

Cisco said it would pay $57 a share for WebEx, a 23% premium over its closing price Wednesday of $46.20. WebEx shares jumped $10.18 to $56.38, while Cisco shares fell 4 cents to $25.81.

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