Cisco Looks Beyond Video With Tandberg Buy

(Updates share price)

SAN JOSE, Calif. ( TheStreet) -- Cisco's ( CSCO) surprise acquisition of Tandberg has cast a spotlight on the firm's video-conferencing strategy, although the $3 billion deal could be a shrewd move that boosts sales of the company's core networking products.

The networking giant, which is trading around $23, is seen as an attractive stock with upside potential. The Tandberg deal barely made a dent in Cisco's $29 billion cash haul, and the company is well-positioned for the anticipated rebound in tech spending.

Because the networking space already is saturated with its switches and routers, however, it makes sense for Cisco to carve out new revenue streams. The company recently bought Pure Digital, maker of the Flip video camera. By buying Tandberg, Cisco CEO John Chambers has taken the firm's video strategy to a new level.

Chambers has been making a song and dance about video for years, although Cisco's efforts have largely centered on the high end of the market. Tandberg extends this reach downstream. The Norwegian firm raked in sales of $808 million last year, and is the 800-pound gorilla in video conferencing.

"Video is the next big thing," wrote William Choi, an analyst at Jefferies & Company, in a note released Friday. "Customers are increasingly adopting video conferencing to save on travel costs and reduce their carbon footprint -- we expect Cisco to further drive adoption with the Tandberg acquisition."

Don't be fooled by all this brouhaha, though. Video may have seized the technology zeitgeist thanks to the phenomenal popularity of YouTube and other video sharing sites, but Cisco still has its eye on its core technologies.

"Video is a high-bandwidth application that could drive demand for network upgrades resulting in increased pull-through for demand for switches and routers," explained Choi, highlighting the importance of Cisco's core business.

The Tandberg deal will nonetheless increase the pressure on video rivals Polycom ( PLCM) and Radivision ( RVSN), whose shares have both taken a hit in the aftermath of the Cisco acquisition.

"This deal suggests Cisco feels it can now attack the balance of the market from a sufficient position of strength," wrote Paul Mansky, an analyst at Canaccord Adams, in a note released Thursday, adding that Chambers is not the only CEO watching video. "The move will put Cisco in more direct competition with similar efforts from Hewlett-Packard ( HPQ), Apple ( AAPL), Microsoft ( MSFT ) and Huawei.

H-P is already daggers drawn with its one-time buddy Cisco after the networking firm's entry into the server space, and also offers its own 'Halo' telepresence and video conferencing products.

As the tech sector slowly emerges from the recession, Cisco is even planning to launch a YouTube-style service for enterprises later this year, in an attempt to tap into the social-networking revolution.

The tech bellwether took a profit hit in its recent fourth-quarter results, but met analysts estimates. The company's first-quarter guidance, however, predicts sales down 15% to 17% on the same period last year, underlining Cisco's desire to breathe new life into its revenue.

Cisco shares dipped 39 cents, or 1.7%, to $22.70 Friday, while the Nasdaq fell 0.02%.

-- Reported by James Rogers in New York

More from Technology

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Tesla CEO Elon Musk Is a Rock Star: Kiss Icon Gene Simmons

Tesla CEO Elon Musk Is a Rock Star: Kiss Icon Gene Simmons

Listen: Should You Buy Cisco Now?

Listen: Should You Buy Cisco Now?

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense