SAN FRANCISCO -- On the Internet, at least, cash isn't always king.
After grabbing a fistful of start-ups in the last year, European telecom suppliers
looked ready to stake out a significant chunk of the fast-consolidating U.S. network-equipment market.
But now currency issues are getting in the way -- acquisition currency, that is.
A winning bet in this sector could pay off handsomely: Recent multibillion-dollar IPOs in the networking sector suggest investors believe the fast-changing Internet-equipment market will be lucrative for years to come. But as swashbuckling dealmakers such as
push up prices for networking properties, the Europeans face a stiff challenge: Find the means to buy fast or risk losing relevance.
Ericsson and Siemens, for their part, say rising prices haven't hampered their acquisition efforts, which they believe to be more measured and deliberate than their North American rivals. But their offers of cash or American depositary receipts, which are shackled in part to the firms' rambling and unfamiliar businesses, have become less appealing to U.S. telecom start-ups. President Bob Emery of
, which has advised deals involving
and Ericsson, says, "It is unquestionable that Cisco's valuation gives it a competitive advantage."
Going to the Sky
Cisco and North American rivals Lucent and
are enticing potential targets with mountains of richly valued stock, which has helped push the average takeout price in the sector as much as 50% higher over 18 months, according to David Schantz, partner with the venture-capital firm
. (Matrix has sold companies to all the publicly held networkers mentioned in this story.) Cisco recently agreed to pay a stunning $7 billion in stock for the fledgling fiber-optic supplier
, which has reported sales of just $10 million, in one of 13 acquisitions Cisco has announced this year.
The Cerent deal helped "shut out the competition from the M&A world," by raising the stakes, says Spencer Punter, partner with venture capitalist
(an investor in
, publisher of this Web site). To find the right acquisitions, Punter says, Cisco rivals such as Siemens and Ericsson will have to quickly pounce on leading targets -- or shop for leftovers.
Calling It In
Ericsson and Siemens run the risk of slipping behind in the "race to pull all the pieces together," according to equity analyst Pete Peterson with
Volpe Brown Whelan
, not a banker for these companies. Peterson rates Ericsson hold, but doesn't officially cover Siemens. His colleague Tim Savageaux says Ericsson and Siemens might need to buy more aggressively if they intend to mount a broad-based attack, as they've planned, rather than competing in a few niche markets.
Out of the Mix?
Earlier this year the Europeans planted themselves in certain niches such as network routers. Ericsson poured roughly $550 million in cash into three acquisitions and a majority investment. While its largest recent acquisition,
, still isn't shipping product yet, Ericsson's earlier investment in the high-profile start-up
enables Ericsson to deliver routers to carriers. Siemens'
also scarfed down three start-ups, two of which now are shipping product, and made a majority investment for a total of roughly $1 billion cash. Just months ago, that was a lot of money.
"It seemed like it was a huge European invasion," says Savageaux. But in the June quarter the European companies sold far fewer routers and large switches to carriers worldwide than did North American competitors Cisco, Lucent or Nortel, according to recent surveys by market researcher
. And while the Europeans just need time to bring some acquisitions to fruition, they also need to keep acquiring. But they've shown little urgency.
"The Europeans have a lot of cash, but they're not the ones I worry about beating to the punch," says Nortel CEO John Roth. "They're not in the fray." His company, already entrenched with North American carriers, has been buying at a rate of one company per quarter.
The Virtue of Modesty
Both companies say they intend to keep their expansion plans modest -- and affordable. Ericsson's marketing vice president Laura Howard says the company will keep extending its "string-of-pearls" strategy at a pace that ensures it can digest properly. Siemens' Burlington, Mass.-based networking arm, Unisphere, likely will acquire one or two more companies by the end of 2000, according to Unisphere CEO Martin Clague. He says he doesn't need to shop as aggressively as Cisco, because Siemens already boasts global service operations and phone-based network systems. He sniffs at Cisco's Cerent purchase, saying, "I wouldn't have had Cerent on my radar screen for half that price."
His Parisian peer
, which has spent $7 billion on U.S. acquisitions in 13 months, has filled its suite of Internet technology more extensively than Ericsson or Siemens, according to equity analyst Angela Dean with
Morgan Stanley Dean Witter
. Partly for those reasons, Dean rates Alcatel buy and the other two stocks hold. Her firm has acted as an investment banker for all three companies.
Sealing the Deal
Meanwhile, Cisco plans to seal at least 20 additional acquisitions on both sides of the Atlantic in the next year, largely using its stock. (Cisco officials didn't respond to numerous requests for comment.)
Because Cisco is valued at 90 times operating earnings for the last four quarters, compared to 64 for Ericsson and 30 for Siemens, it is comfortable lavishing lots of stock on acquisition targets.
Analyst Savageaux proposes a solution for the Europeans: Create their own acquisition currency by listing separate shares for their U.S. Internet-gear subsidiaries.
stunning debut on the
Friday underscores the value of uncorking all that market enthusiasm for futuristic Internet systems.
Siemens' Clague won't comment on the possibility, except to say that right now he's focused on building two or more quarters of revenue growth at Unisphere's acquired units. Ericsson's Laura Howard says that her company needs its U.S. unit to be closely integrated with the global operations and that creating a separate stock has not proven necessary either for recruiting or acquisition efforts.
Meanwhile, Cisco widens its lead.
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