Cisco sets its sights on Tandberg

OvumCisco has offered approximately $3 billion for Tandberg stock, an 11% premium on the latest trading price and a three times multiple of revenues. If the deal is completed, Tandberg’s current CEO will head up the group’s worldwide telepresence business – he will be responsible for two-thirds of the telepresence estate in enterprise global services.
We think this is a smart deal for Cisco. Tandberg has the full toy box for videoconferencing systems. And while Cisco has made a big noise with Cisco TelePresence since it launched in 2006, videoconferencing is much more than big-screen suites – which make up only 25% of the market.
Strategically, the big question is where the services are. If there’s something unexciting about this deal it is because it is a bit of classic box-buying and not a services acquisition. All of Cisco’s product development news is around service architectures and service support, and this isn’t. Services account for 16% of Tandberg’s revenues, and while Cisco CEO John Chambers purred at the near-50% service “attachment rate” in telepresence, that’s only at the top-end of business video communications. Also, for fellow CEO Fredrik Halvorsen, service attachment is probably a new term; for him service is something that’s included in the package.
The two will need to sort out what’s important here – more box-shifting, or an earth-moving shift to service packages on video.
Tandberg is ahead of the curve on the server side with multimedia content software, so maybe Cisco can profit from that in its own infrastructure products. Otherwise, Tandberg is 60% endpoints (screens), which just suggests a big headache on branding, price points and channel management.
The financials are unexciting. Tandberg’s gross margin is already 66.1% against Cisco’s 64.1%, so the integration wizards at Cisco won’t be busy. This is not like the Scientific Atlanta deal which diluted Cisco’s gross margin to less than 50% at a stroke – a situation Cisco turned around within two quarters. However, Tandberg people will be pleased with the price tag. And enterprises have the mouth-watering prospect of “boardroom to desktop” business video – if Cisco and Tandberg can act together quickly.
We have found videoconferencing to be the most resilient of all communications technologies through the downturn. The requirement for inter-company conferencing is increasing as companies federate more with partners and suppliers, and that is helping to drive a second wave of deployment of telepresence networks with 100 or more sites – compared with the typical 5–30 sites we have seen so far. This looks like a rapid-growth market right now, and we expect revenues from equipment and services will reach $892 million in 2011 before tailing off as the global MNC rush to deploy loses pace.
What was disappointing about the Cisco’s briefing was that we didn’t get much of a feel for how the combined Cisco-Tandberg entity will alter the motivation for the use of video within the organization beyond the RoI case around operational cost savings. The combination makes senses because the Tandberg toy box allows the enterprise to expand video solutions in a more complete manner.
The vision is clear; the execution path is not. Cisco will put its weight behind the service provider in the telco channel to more aggressively push video at all layers of the enterprise. John Chambers said as much in his answer to our question yesterday (on a telepresence call, of course). That said, Cisco does have a record for successful execution.
Interoperability was highlighted as a key feature, focused not just in-house between Cisco and Tandberg but between Cisco and other collaborative tech vendors such as Microsoft, as Cisco drives its network technology to be the center of collaborative working.
At the global operations level, AT&T, BT and Cisco will now have to sort out which of BT’s Global Video Exchange, Cisco’s Intercompany CTS or even Tandberg’s Global Exchange Service should be the global interoperability standard.