Somebody check the calendar. Are we really just days from 2006, or is this still 1999?
On Tuesday, Canadian communications equipment maker and former tech darling Nortel Networks (NYSE:NT) agreed to pay $99.5 million to acquire San Jose, Calif.-based router maker Tasman Networks. While little public information is available on privately held Tasman, what little there is should suffice to raise eyebrows about the purchase price.
According to financial-data scourer Hoovers.com, a division of information behemoth Dun & Bradstreet (NYSE:DNB), Tasman has been in business since 1997, so a start-up this is not. Still, after nearly a decade in business, the company manages to make less than $10 million in sales per annum -- Hoovers puts the amount at $7.8 million. At the advertised price, therefore, Nortel looks to be paying a whopping 12.8 times sales to acquire Tasman's technology. Compare that valuation to the mere 1.3 multiple that Nortel's own shares fetch, and it should be clear why skepticism about the wisdom of this purchase abounds.
It's not, after all, as if Nortel is the kind of money-printing machine that's able to afford a $100 million gamble here and there. According to Capital IQ, Nortel has $600 million in net cash (cash and equivalents minus long-term debt) before it shells out for Tasman. But over the past 12 months, Nortel burned through $257 million in free cash flow, meaning that unless it reverses its cash-burning ways, it could become saddled with net debt within two years.
Compare that with the performance of the company's primary U.S. rivals, Lucent (NYSE:LU) and Cisco (NASDAQ:CSCO). Lucent's balance sheet remains uglier than Nortel's, with $2.3 billion in net debt. But on the plus side, Lucent has already begun generating free cash flow after its bubble-burst meltdown; its free cash flow fell just shy of $500 million over the past 12 months. Meanwhile, tech titan Cisco continues to carry $13.5 billion in cash and generated $6.8 billion more in free cash flow over the past year.
So to sum up, Cisco continues to lead this tech trio, with cash in the bank and more flowing in every day. Lucent is dead last in terms of cash, but it's gaining ground steadily. Nortel sits in the No. 2 slot with a sizeable cash hoard, but it's losing ground steadily. Let's hope the Tasman deal works out for Nortel, because Nortel really isn't in a position where it can afford many mistakes.
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Fool contributor Rich Smith does not own, nor is he short, shares of any company mentioned in this article.
