Corporate acquisitions make fascinating business case studies. Cisco recently announced an acquisition offer of $3.2 Billion for Web-Ex, a NASDAQ traded company (WEBX). For most of the past 12 months Web-Ex has been trading between $35 and $40 per share for a total market cap of between $1.75B and $2 Billion. Just four years ago the stock market valued Web-Ex at $600 Million. Web-Ex went public in July of 2000. Cisco is paying a pretty big premium to get Web-Ex. Is it worth it?
Microsoft acquired Placeware, the second most popular web conferencing company, in April of 2003 for somewhere around $200 Million, at a time when Web-Ex, the industry leader, was valued at $600M. Of course there would have been a takeover premium of 20% or more, so figure Web-Ex could have been acquired for $750M. So which was the better deal then, and now?
Should Microsoft have acquired Web-Ex for $750M or Placeware for $200M? Well, the first answer is that Cisco could have acquired Web-Ex for $750M four years ago too...but decided to pass. Why would Cisco pass at $750M and 4 years later acquire them for $3.2B? It could be as simple as they had other priorities at the time.
Microsoft viewed web conferencing as a component of a full collaboration suite consisting of E-mail, Instant Messaging, file sharing, and Voice over IP. Web-Ex saw it as a stand alone application. The strategic view makes a big difference in the value you place on the asset. Microsoft got what it wanted out of Placeware. It became the integral part of what is now called Live Meeting, a reasonably successful product for Microsoft.
Business model match ? - Microsoft's business model is to sell software products for a license fee. Web-Ex was all about selling a hosted service on a dollars per minute basis. This is a great business model but it didn't match with anything else Microsoft was doing, and certainly didn't fit with the Microsoft Messenger / Live Meeting strategy of the time. It was probably easier to acquire Placeware for $200M and make it fit the Microsoft model than it was to spend $750M for Web-Ex and not optimize their existing revenue model.
Cultural fit? Believe it or not, this is a very important consideration. Placeware moved all its people to Redmond where they could work with the rest of the Microsoft team to develop an integrated product suite. Perhaps the key people at Web-Ex were not willing to move from Santa Clara. People are a huge part of the value of an acquisition. If you can't keep the key people or get them to move where you need them...the acquisition loses its value rapidly.
Microsoft made the right choice. Given the strategic objectives, product plans, business models, and cultural fit, Microsoft made the right choice in acquiring Placeware. Financially, the $200M price tag fit the model, and cost $3 Billion less than Web-Ex.
Did Cisco make the right choice? Yes, I think Web-Ex makes sense for them. They paid a lot more than they would have four years ago, but in the long run it will probably work out. But why didn't they save several billion dollars and acquire them earlier? Good question, but my guess is that Cisco was not looking to get into this business four years ago. Cisco stayed pretty close to its networking roots. Lately they have made a big push into communications with VoIP phones, video, and now web conferencing. Sometimes it just takes a while for all the pieces to come together in the right place and time.
Stock market metrics? From a purely financial point of view this is hard to swallow. Today the stock market values Cisco at a P/E of 25 times earnings. They are buying Web-Ex for about 60 times earnings. Unfortunately Web-Ex's revenues ($380M) and earnings ($48M) will not materially effect Cisco's numbers, $28.5B and $5.6B respectively. So, the stock market will apply Cisco's P/E to Web-Ex's numbers for an immediate market cap loss of about $1.7 Billion dollars, or about 1% of Cisco's current $160B market cap. Not to worry, If Cisco can crank up the revenues and profits from Web-Ex and leverage their other communications investments the stock market will reward them...far beyond the purchase price.
Contrast this acquisition with Google's $1.6 Billion dollar acquisition of YouTube. Sorry, but I can't make any sense of those numbers. Add on the billions of dollars in licensing fees to TV and film studios, and billions more in lawsuit settlements to Viacom and others. Well, you get the idea...Cisco looks like a genius in comparison.
What do you think? Did Microsoft make the right choice? Did Cisco pay too much? Acquisitions are all about what you will do with them in the future...not what they are today. What do you see happening in the future? Leave a comment and join the conversation.
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Interesting post. But you left out discussing whether or not MSFT should have acquired Webex either then or now? From what I understand, it vaulted CSCO into #1 spot in the category over MSFT (at least that's what numerous media outlets reported). Personally, I think CSCO paid too much. But with more cash and a focus on the same space, it's more interesting that MSFT wasn't a bidder.
Posted by: Bob | March 20, 2007 at 02:15 PM