As Always, Cisco's Making All the Right Moves

Yes, the price tag on the Cerent deal is steep -- just as the returns promise to be.
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Yo, John! Wanna buy my company? Heck, I don't even have a networking/tel-tech/fiber/routing-technology company. But at these prices, I'll start one damned fast. You just watch. I'll get back to you, John.

It's said that CEO

John Chambers

choked when he first heard the proposed $6.9 billion price tag for

Cisco's

(CSCO) - Get Report

latest acquisition,

Cerent

. But in the end he said yes, and shareholders ought to send him personal thank-you notes for this leap of faith.

The price was a result of the barn-burning market performance of other tel-tech companies this year. Since its IPO in late June,

Juniper Networks

(JNPR) - Get Report

, for example, has seen its market value soar to almost $11 billion. Clearly Cerent used that as a benchmark to drive up the price Cisco paid; with a pending IPO, hot technology and products in a scalding-hot market, and the right customers, Cerent held all the cards.

Cisco's been on an acquisition tear lately, of course -- as has

Lucent

(LU)

(which I am long), its big competitor in equipping fast networks -- but the Cerent deal has gotten much attention this morning because of its audaciousness. Cisco spent almost $7 billion of shareholders' money on a tiny, 200-person company begun just a little over two years ago, with a grand total of $10 million in sales over that time. Ten million! Hoo-boy: big-time! (

John, I can hit $10 million in less than 12 months.

)

In fact, unlike fill-in-a-gap acquisitions, Cerent powerfully extends Cisco's reach. After dominating the corporate-networking market, Cisco had to look further afield, and settled, logically enough, on tel-tech. But it has only some of the products the big fiber-network outfits need. Cerent's products and technology bridge the fast, long-haul networks being built and run by the likes of

Qwest

(QWST)

,

Frontier

(FRO) - Get Report

and

Williams Communications

(WMB) - Get Report

into local networks. No one,

no one

, has products that bridge data and voice into local systems nearly so well as do the Cerent tools. As Qwest, Frontier and Williams, along with others, will testify: They're lining up at Cerent's check-out counters with very big baskets, indeed.

This is obviously a big win for Cerent investors, too: Silly Valley VC giant

Kleiner Perkins

put $8 million into Cerent two and a half years ago (and partner

Vinod Khosla

in Cerent's chairman's seat) ... and will collect $2.1 billion in Cisco shares. Nice.

Now, as I was saying, John ... let me tell you about the networking-technology company I formed a couple of minutes ago, right after I started this column. I figure our IPO next month will set us up with a market cap of about $1.5 billion -- sure to soar over the succeeding month -- so that's where you and I can start talking...

Seriously, the pace and cost of tel-tech expansion is breathtaking -- and ought to be. Cisco and others, very much including Lucent, which are today positioning themselves for the tel-tech future, will earn enormous returns on these strategic technology investments.

Not all the smart investments, we should note, are in technology: Remember Cisco's recent investment of $1 billion in

KPMG's

consulting practice? That was a frontal assault on Lucent (which around the same time acquired consultant

International Network Services

for $3.7 billion) and on the networking business in general. Not only can Cisco tap its own thousands of sales reps; under the KPMG deal, KPMG will add another 4,000 consultants, specially trained to set up Cisco products in corporate networks.

Another brilliant stroke.

Cisco was up a couple of dollars here Wednesday, but down seventy-five cents in overnight trading in Europe. That must have been a knee-jerk response in Europe to the price of the Cerent deal, and the dilution Cisco holders will take; but it was a foolish response. Thursday morning the stock was up fractionally to 69 1/16.

It seems to me Cisco's doing exactly what it should be doing right now. Lucent's doing well, and will continue to do so -- I think smart investors hold both -- but this acquisition sets Cisco apart, in terms of a broad and far-seeing vision and the willingness to put big bets on the table.

The "Chicago Bulls of the Nasdaq," per

JJC

, just did it again.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Lucent and Qwest, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.