Fool.com: Cisco Pays Up For Cerent (Breakfast News) August 26, 1999

BREAKFAST WITH THE FOOL

Thursday, August 26, 1999

"Whenever you find yourself on the side of the majority, it's time to pause and reflect."
-- Mark Twain

Cisco Pays Up For Cerent

By Brian Graney (TMF Panic)

Expanding its reach into the transporter/transmission business of the service provider area, networking infrastructure company Cisco Systems (Nasdaq: CSCO) announced it will acquire privately held Cerent Corp. for a jaw-dropping $6.9 billion in stock, or 100 million shares. As first reported by The Wall Street Journal and The New York Times, Cisco also is handing over $500 million in stock for another privately held firm, Monterey Networks Inc.

While both companies possess promising technologies for helping telecommunications networks operate more efficiently, expect the two-year-old Cerent to get most of the attention today due to the jumbo-sized price tag. The price level can be chalked up to the fact that Cerent was gearing up for an initial public offering, prompting Cisco to value the company through the eyes of the tech-giddy stock market. As of June 30, Cerent had booked a bit more than $10 million in revenues over the life of the company. In comparison, Internet backbone router maker and recent IPO darling Juniper Networks' (Nasdaq: JNPR) less than $32 million in lifetime revenues through June 30 has fetched a current market valuation of $11 billion. Based on these bizarro-world valuation standards, Cisco may very well be getting a bargain.

Cerent's flagship product -- in fact, its only product -- is an optical transport device called the Cerent 454 that integrates multiple voice and data services operating at transmission rates up to 240 gigabits per second (Gbps) all in one box. At a base price of $20,000 to $50,000 a pop, the Cerent 454 represents an easy and relatively low-cost way for service providers to boost their bandwidth delivery ability. Among the firm's more than 100 customers are Qwest Communications (Nasdaq: QWST), Williams Communications (Nasdaq: WMB), and Alltel (NYSE: AT). While much will be made of the fact that the Cerent 454 competes directly with offerings from Nortel (NYSE: NT), Lucent (NYSE: LU), and Alcatel (NYSE: ALA), it's not incredibly surprising that Cisco would choose to enter into this area. Cisco's been acquiring companies in the transporter/transmission market for most of this year, and getting into the optical transport market with Cerent is simply an extension of that strategy. With some analysts seeing Cisco's overall market opportunity expanding to $140 billion within the next few years, don't expect the company to be shy about ponying up its high-flying stock for other technologies that can help it gobble up as much of this market as possible.

News to Go

Drug store operator Rite Aid (NYSE: RAD) announced last night that it is in talks concerning possible "corporate transactions," leaving the door open for everyone and their brothers to speculate just what that may mean. According to The Wall Street Journal, a merger with supermarket chain Albertson's (NYSE: ABS) or a leveraged buyout are two possibilities.

Enterprise resource planning (ERP) and supply chain management firm J.D. Edwards (Nasdaq: JDEC) posted a fiscal Q3 loss of $0.07 per share (excluding charges), down from last year's earnings of $0.16 per share but not quite as bad as the loss of $0.10 per share expected by analysts surveyed by First Call. The company also announced plans to buy back up to 8 million shares.

Enterprise application integration (EAI) products developer New Era of Networks (Nasdaq: NEON) said it will repurchase up to 10% of its outstanding shares over the next 12 months. The company said the buyback will help offset dilution from incentive stock programs.

Troubled life insurer General American Life Insurance Co. is close to reaching a deal to be acquired by mutual insurance giant Metropolitan Life Insurance Co. for up to $1.2 billion, according to several reports. General American owns controlling stakes in life reinsurer Reinsurance Group of America (NYSE: RGA) and money manager Conning Corp. (Nasdaq: CNNG).

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