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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerThis morning Cisco Systems Inc. (NASDAQ:CSCO) announced its intentions to buy WebEx Communications Inc. (NASDAQ:WEBX) for $3.2 billion. It is an amazing seven times revenues for this company and WEBX shares are up over 22%. WebEx has been a frustrating stock for many analysts. The analytical community was always concerned about the commoditization of the WebEx products set. The operating margins have been consistently above 25%, which in itself, is stunning.
As I have written about before, Cisco is hugely successful in the development aspect of the "research and development" component. If Cisco cannot "research" something, the company buys it and "develops" it. WebEx is no exception. Two to three years ago, both Cisco and Microsoft Corp. (NASDAQ:MSFT) were going to have their own product set for web-based conferencing and blow WebEx out of the water. WebEx was going to be relegated to commodity status and operating margins were going to be eviscerated. Right. Who's laughing now?
One senior analyst I know has had a sell-rating on WebEx since the shares were at $22, three years ago. WebEx never wavered and kept its technology fresh and innovative. It also was passionate about customer relations. It serviced and serviced its customer base and the so-called expected attrition never really materialized.
WebEx stayed one step ahead of the competition and the pricing Bogey-man by launching new products such as WebOffice and MeetMeNow. With such innovations, WebEx kept its operating margins above 25%. The value of the franchise never wavered and the proof is Cisco paying 7x revenues. Cisco rarely makes stupid acquisitions; obviously it saw the merits of paying up for this company.
Wall Street analysts never got this one right and WebEx is indeed enjoying the last laugh!
Georges Yared is the author of Stop Losing Money Today and Baby Boomer Investing. Please visit www.georgesyared.com
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Reader Comments (Page 1 of 1)
3-15-2007 @ 1:50PM
Herb Levitin said...
Cisco bought another web conferencing company called Latitude a couple of years ago and it disappeared from the market nearly overnight. I am the VP of Business Development of Persony whose founder has 14 software patents including Apple's QuickTime VR. He sold his last company Presenter to WebEx. The new Persony web conferencing product called VShow turns web conferencing into a commodity. We have just been selected by a Fortune 25 as an on-premises solution over WebEx. WebEx can not even do an on-premise service. In a year or less large service providers such as AT&T or ime Warner will be able to offer the same service as WebEx for $4.95 and have an 80% margin.
This purchase of WebEx will wind up losing money for Cisco as did the Latitude acquistion. Cisco is a hardware company not a services company and they are not going to have an easy time absorbing the WebEx bureaucracy.