Does This Upside-Down Deal Make Sense?

Polycom (Nasdaq: PLCM  ) has turned the tables on the teleconferencing market. Or is Hewlett-Packard's (NYSE: HPQ  ) CEO just playing to his strengths?

The minuscule teleconferencing specialist has agreed to buy HP's Visual Collaboration division for $89 million. This deal was supposed to go the other way around, as cash-rich HP seeks plug-in acquisitions, but that wasn't in the cards.

Instead, HP is shedding a hardware unit. That makes plenty of sense, given fresh-faced CEO Leo Apotheker's software-heavy background. Why not trim down a few low-margin hardware units and refocus on what the boss knows best?

The deal makes Polycom the go-to solution for HP customers with an interest in teleconferencing, and includes a two-way commitment to provide Polycom applications for HP's WebOS platform. Before you scoff at that idea, remember that HP has extended that software from a pure-play mobile platform onto stationary gear such as printers. Teleconferencing systems would just be another step in that journey away from HP-Palm's now insignificant stake in the smartphone industry.

The agreement also precludes any kind of relationship -- acquisitive or otherwise -- between Polycom and chief rival Cisco Systems (Nasdaq: CSCO  ) . If there is a more heated rivalry in Silicon Valley than that of Cisco and HP in the era of Cisco-branded server systems, I haven't been told. Spherical green pigs will party with angry, red birds before those two sit down to sing "Kumbaya" again.

Teleconferencing is suddenly hot again, after Microsoft (Nasdaq: MSFT  ) spent $8.5 billion to acquire video-and-voice communicator Skype. Another Icelandic ash cloud stretching across Europe also heightens the videochat industry's profile while it lasts. So it's not surprising to see Polycom strike a deal -- though the way it all worked out might raise a few eyebrows.

Be ready to put two and two together the next time Polycom makes a seemingly unpredictable move. Just add Polycom and a few key rivals to your Foolish watchlist, and you won't miss a thing:

Motley Fool newsletter services have recommended buying shares of Cisco Systems, Microsoft, and Polycom as well as creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Motley Fool owns shares of Microsoft and has created a bull call spread position on Cisco Systems. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On June 03, 2011, at 12:08 AM, BradReeseCom wrote:

    Hi Anders,

    According to RBC Capital Markets Managing Director - Mark Sue:

    "We're reiterating our Outperform rating on Polycom as the company adds to its strong core of strategic partnerships. Polycom is effectively leading the charge on unified collaboration as the only independent provider of significant scale, with the help of significant competitors to Cisco. It’s our view that Polycom’s updates on the HP and Microsoft partnerships and the newly formed Open Visual Communications Consortium bring increased visibility to our CY12 estimates. For CY12, our conservative EPS estimate is $2.65 vs. consensus of $2.76, and with more partners kicking in next year we generally believe estimates may move incrementally higher to $3.00.

    "Polycom announced the acquisition of HP’s visual collaboration business unit, which includes the Halo product line and managed services solution. In conjunction with the acquisition, Polycom and HP solidified their partnership with an agreement for Polycom to be the sole provider of video collaboration products that HP resells and deploys internally. The deal is expected to close in 3Q11, near August 1, and may be slightly accretive to earnings at closing. For the current quarter, we're estimating $360M and $0.49 vs. consensus of $363M and $0.50."

    Sue continued, "Although some may have been concerned about the ramifications of Microsoft’s recent acquisition of Skype, Microsoft and Polycom reaffirmed the strength of their partnership by announcing the next product integration. 'Rally' enables Lync activated desktops to connect to meeting rooms that have video conferencing enabled. This product is estimated to ship in 4Q11."

    Sue added, "Interoperability is a large part of Polycom’s open collaboration message and is a key differentiator against other platforms. The Open Visual Communication Consortium is a network of service providers that promotes interoperability for the purpose of driving B2B and B2C collaboration. The initial fourteen service providers include AT&T, Verizon, Telstra, Orange, BT, and others. Products may start shipping in 4Q11."

    Sue concluded, "Polycom is benefitting from its partnerships (23% of revenues in the last quarter) and Microsoft and HP may now be the two strongest partners. Most of the products related to its recent announcement are scheduled for the latter half of 2011 and may begin to contribute significantly to revenues in 2012 and beyond."

    ------------------------------------

    Back in June 2010, Poylcom CEO Andy Miller triumphantly bragged:

    "A mid-sized enterprise will spend up to $2.1M less in the first year on a typical Polycom Telepresence deployment including - equipment, bandwidth, services and maintenance costs - versus a comparable Cisco Telepresence deployment. We are excited to deliver the first end-to-end solution supporting H.264 High Profile, which will help our customers lower network bandwidth costs and cost-effectively expand their deployments."

    http://www.bradreese.com/blog/polycom-6-8-2010.htm

    Sincerely,

    Brad Reese

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