Why Cisco Can't Overspend on Tandberg

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Will this waiting game end in victory?

Networking giant Cisco Systems (Nasdaq: CSCO) has extended the deadline for its all-cash offer to acquire Norwegian video conferencing expert Tandberg. The original buyout offer, which puts a value of $3.1 billion on Tandberg, was set to expire yesterday. Cisco extended the deadline until November 18 but did not change the offer in any other way, which could be troubling since only 9.4% of Tandberg shareholders had accepted the offer as of yesterday.

What's going on?
Major Tandberg investors have publicly rejected Cisco's offer because they feel the price is too low. It looks like Cisco is planning to talk to those dissidents for another couple of weeks, and there's always a chance that one side or the other will change its official stance. Tandberg might become a Cisco division yet, completing the second major acquisition for Cisco in 2009.

But it's more likely an empty gesture that will lead to nothing new. We've seen this move before, like when Microsoft (Nasdaq: MSFT) put the moves on Yahoo! (Nasdaq: YHOO) in 2008, or when Electronic Arts (Nasdaq: ERTS) laid bedroom eyes on smaller game developer Take-Two Interactive (Nasdaq: TTWO) later that year. In both cases, the buyer stuck with the original offer while the intended brides insisted on a larger dowry. And in both cases, the deals evaporated into thin air.

How the other stiff-necked deals failed
Microsoft later came back to start a Web search partnership with Yahoo!, but there's no wholesale merger in sight. Yahoo! shareholders are about 48% worse off today than if they had taken that first offer, while Microsoft owners have managed a market-beating performance since early February of 2008. It looks like Yahoo!'s shareholders picked the wrong door that time (though I still think that Yahoo! is better off alone in the long term). This is probably not the outcome Tandberg's owners are hoping for.

In the Take-Two saga, the roles are reversed: Take-Two has outperformed EA as an investment, but both stocks have fallen harder than the S&P 500 at large. This, too, is a suboptimal outcome that nobody wants to emulate.

High-quality teleconferencing is an idea whose time has come, and Cisco loves building out data networks everywhere to support these bandwidth-hungry video feeds. So could Tandberg be the exception that proves the rule?

Cisco clearly could afford to raise its bid a smidgen, but it’s also busy buying other businesses. That fat stack of cash could come in handy somewhere else if the Tandberg deal doesn't work out. And yielding to the demands this time could set an expensive precedent for deals in the future. So I think Cisco will take the advice of Tom Petty: "I won't back down."

Why this deal is different
So the ball is back in the Norwegian court. Merging with Cisco will clearly increase Tandberg's contact area with potential customers across the globe. At a reasonable purchase price for both companies, it seems like a smart thing to do, because Tandberg under Cisco should command far higher sales and profits than Tandberg on its own. That is what makes this deal unlike the Microhoo story: The Yahoo! brand and technology already had their own global identity, and Microsoft was trying to buy something that it had tried and failed to build on its own.

Cisco, on the other hand, already sells the TelePresence form of high-end teleconferencing solutions that Tandberg is famous for, and the two companies have the TelePresence market pretty much to themselves. The only other serious choice today is small-cap outfit Polycom (Nasdaq: PLCM), which is hovering around the $1 billion annual sales mark for its full range of products and services. Video communications is only about half of Polycom's business.

The end result
Putting Tandberg together with Cisco seems like a brilliant deal for both sides of the buyout -- but not at any cost. Keeping Cisco's acquisitive nature in mind, the "won't back down" ethic could be worth many billions of dollars over the next few years. The company could cave in to Tandberg shareholder demands, raise the price, and walk away a happy owner this time, but then face similar expectations in future deals.

Sitting out this waltz with Cisco is not likely to bring any new suitors to Tandberg's table, either. I don't see anybody out there with the expertise needed to enter the video conferencing market. Hewlett-Packard (NYSE: HPQ) currently partners with Tandberg to offer TelePresence solutions, but hasn’t shown much interest in expanding into the market on its own. Cisco included an 11% buyout premium in the current offer, on top of a remarkable rise in Tandberg's share price in recent months. It's the best offer Tandberg can expect, and the best Cisco is going to give 'em. So if I was a Tandberg owner today, I'd sell to Cisco or forever hold my peace. There's no bid-raising action on the way here -- or any other time Cisco sits down at the negotiating table.