Cisco Ups Ante in War with Microsoft

In an escalating arms race for control over the unified communications market, Cisco's acquisition of WebEx is its largest yet

by Olga Kharif

About a month ago, WebEx found itself on the receiving end of several unsolicited takeover offers. WebEx Chief Executive Subrah Iyar had long insisted the decade-old Web conferencing company would go it alone. But the overtures were so attractive, he says, he couldn't disregard them without rousing shareholder ire. Rather than settle, he dispatched representatives from WebEx's headquarters in Santa Clara, Calif., to the Cisco Systems hub in San Jose, in hopes of attracting another, more attractive bid.

The 2.9-mile jaunt across Silicon Valley paid off. Cisco (CSCO), the largest maker of networking equipment, on Mar. 15 said it would pay $3.2 billion in cash for WebEx (WEBX), which helps more than 2 million registered subscribers hold meetings and share information over the Web. The deal values WebEx at $57 a share, 23% more than its Mar. 14 closing price, and a 67% premium to the stock price in early January, before upbeat fourth-quarter results triggered a rally. It's the largest acquisition for Cisco since the $6.9 billion purchase of set-top box maker Scientific Atlanta in 2005, and it's due to close later this year.

Why the Hefty Price

With $20 billion in cash, Cisco can certainly afford WebEx. But the target didn't come cheap, especially for a company that in recent years has spent closer to $100 million or less on most deals, Scientific Atlanta aside.

So what's WebEx got that Cisco wants? It aids Cisco in a battle with Microsoft (MSFT) in the growing market for what's known as unified communications, various technologies that foster collaboration in the workplace, including instant messaging, e-mail, calling services, and letting even far-flung users know when colleagues are unavailable (see BusinessWeek.com, 1/18/07, "Nortel and Microsoft Take Aim at Cisco").

Cisco and Microsoft are engaged in a takeover tug-of-war in communications services. On Mar. 14, Microsoft said it purchased voice-recognition services provider Tellme Networks (see BusinessWeek.com, 3/15/07, "Microsoft's Expansive Plans for Tellme"). That, in turn, came on the heels of Cisco's February purchase of Reactivity, which helps companies improve how they do business over the Web, for $135 million in cash, and Five Across, a provider of social-networking capabilities. "There's been that arms race developing between Cisco and Microsoft," says Jon Arnold, president of telecom consultancy J Arnold & Associates. "They are battling for control of enterprise communications. Both companies are caught up in a spending spree, outspending each other to keep [promising outfits like WebEx] away from competitors." WebEx wouldn't name its suitors, but candidates included Avaya (AV) and Siemens (SI), says Arnold. Other analysts say IBM (IBM) likely was interested, too.

Narrowing Microsoft's Lead

WebEx and Tellme probably won't be the last acquisitions for Cisco and Microsoft either. "We are always talking to various companies," says Janice Kapner, director of marketing for the Microsoft Unified Communications Group. "We'll make the right investments to make [unified communications] happen." Meantime, Cisco Chief Development Officer Charles Giancarlo and other executives hinted in a Mar. 15 conference call that they're amenable to shelling out for more mature companies, not just startups.

Analysts reckon Cisco may be looking to acquire companies that specialize in customer relationship management or mobile communications. Microsoft, meanwhile, may be looking to boost its communications hardware and social-networking capabilities.