Over the weekend, I saw an interesting item over at CNET about Cisco (NASDAQ: CSCO) wanting to up the competitive ante against Microsoft (NASDAQ: MSFT). Cisco is investing in its WebEx conferencing technology to make it more valuable. According to the article, it seems as if Cisco may want to go after some of the market that is served by Microsoft's Office suite. The company will do this by offering up applications devoted to document and spreadsheet needs.

Darren Shafae operates Paper-Check.Com, which is a proofreading business. Without web-based technologies, his business would probably be far smaller.

"I have taken the best of ideas I have seen, and refined them to meet our needs and improve work flow and customer and employee satisfaction," said Shafae.

So, what kinds of applications does Shafae use to improve his business? Well, let's take a look:

GotVMail: Basically, this is a virtual PBX system. In other words, there is no need to manage hardware or pay for consultants. Instead, Shafae pays for the service on a subscription basis.

Some of the features include custom greetings, multiple extensions, music-on-hold, toll-free numbers, Dial-By-Name Directory and so on. According to Shafae: "GotVMail offers professional voice talent that gives the impression that there are thousands of operators standing by to address client needs and concerns."

Technology powerhouse Cisco Systems (NASDAQ: CSCO) announced the acquisition of private company Cognio. The financial terms were not disclosed as is Cisco's nature to when acquiring private companies. Obviously, it must reveal purchase price and terms if it acquires a public company, as it recently had with WebEx. Cisco paid over $3 billion for WebEx. Cognio adds to Cisco's portfolio in the wireless technology sector.

Cisco Systems is the expert in integrating acquisitions into its ever-growing tent. To date, it has acquired over 130 companies since 1993. Cisco has re-defined the world of research and development (R&D), as while it has been the master of development, it hasn't bothered too much with the research side of the tandem. Cisco's strength lies in integrating a newly acquired entity very quickly and very seamlessly into its own operations. From where every one sits in the headquarter building to the finite points of its 401k plan, Cisco has an internal team that jumps into action the moment its CEO blesses and signs on the bottom line.

Cisco has made some brilliant acquisitions in the past such as Scientific Atlanta and WebEx, as well as some duds. The beauty of Cisco's strategy is to recognize mistakes quickly, correct them and march on. Nurturing a bad acquisition is not in its make up. Cisco will eliminate non-cooperating staff with lightning speed while retaining the valuable technology of the acquired.

Cisco Systems Inc. (NASDAQ: CSCO) reported its third fiscal quarter ending April 30th and the results were quite good. The company reported revenues of $8.9 billion and earnings per share of $0.30, both slightly ahead of expectations. The operating margins came in on target at 29%+, demonstrating the excellent cost control of Cisco and pricing power holding up. Guidance for the fiscal fourth quarter ending July 31, 2007 is for revenues in the $9.2-9.3 range and earnings per share in the $0.35-0.36 range. By all accounts Cisco flexed its muscles and showed year-over-year growth of 21% for revenues and over 30% for earnings. The fourth quarter will show a minimum growth of 15-16% year-over-year.

I had the opportunity to interview Jonathan Chadwick, VP and Controller of Cisco. Mr. Chadwick has been with Cisco for over ten years. He was very upbeat about the third quarter results and even more enthused about the fourth quarter and the health of Cisco's overall business.The WebEx acquisition is expected to close in the middle of the fourth quarter and it is obvious Cisco has great plans for this acquisition. WebEx will enter the Cisco machine with a revenue run-rate of $250 million. As Cisco integrates WebEx, that run-rate will accelerate as Cisco appeals to the "entire enterprise" while WebEx has experienced its success on a departmental level. The up-selling opportunities are enormous and the product expansion possibilities are also exciting for Cisco.

MOST NOTEWORTHY:

• Wachovia downgraded shares of WebEx Communications Inc (NASDAQ: WEBX) to Market Perform from Outperform to reflect the company's pending acquisition by Cisco Systems (CSCO).
• Bank of America cut Avaya Inc (NYSE: AV) to Neutral from Buy with a $13 target after taking in account the company's acquisition of Ubiquity Software Corp Plc. The firm believes sales may miss consensus for the next few quarters, while gross operating margins could disappoint.
• CIBC downgraded Tractor Supply Co (NASDAQ: TSCO) to Sector Performer from Sector Outperformer. The firm sees some moderate upside for shares of TSCO but says it will be incrementally more difficult to achieve without a major fundamental driver in the near-term.
• WestLB AG downgraded shares of Nokia (NYSE: NOK) to Reduce from Hold.
• Mattel Inc (NYSE: MAT) was cut to Market Perform from Outperform at BMO Capital on valuation.

• First Albany downgraded Cerner Corp (NASDAQ: CERN) to Neutral from Buy.
• Keefe Bruyette downgraded A.G. Edwards, Inc (NYSE: AGE) to Market Perform from Outperform on valuation.
• Rodman & Renshaw downgraded shares of Genentech, Inc (NYSE: DNA) to Market Perform from Outperform citing a slowdown in near-term growth and valuation that reflects most of its future growth.
• BMO Capital cut both Anadarko Petroleum Corp (NYSE: APC) and Cabot Oil & Gas Corp (NYSE: COG) to Underperform from Market Perform.

Barron's has floated the possibility that SAP (NYSE:SAP), Oracle Corp. (NASDAQ:ORCL), or IBM (NYSE:IBM) might outbid Cisco Systems Inc. (NASDAQ:CSCO) for video-conferencing company WebEx Communications(NASDAQ:WEBX). The current bid is 28x the company's 2007 free cash flow.

But, by many measurements, Cisco may be paying too much, which makes another suitor unlikely.

A look at the WebEx 10-K does not show much that is impressive in revenue or net income growth from 2005 to 2006. The top line went from $308 million to $380 million. Net income fell from $53 million to $48.6 million. The company's margin dropped to 13%, which is hardly impressive for a tech company. The WebEx sales and marketing costs are also increasing rapidly. From 2004 to 2005, they rose 22% to $102.7 million, But last year they were up 38% to $141.8 million, a sign that the company has to invest substantial sums to keep revenue moving up.

Shares in WebEx has also gotten extraordinarily expensive over the last two years. The stock is up over 160% while the S&P 500 is up less than 20%. Even Cisco's is up only a little over 40% over that time.

WebEx may be the leader in video-conferencing, but there are less expensive products from companies like Microsoft, and there are a number of multiple-party video products from companies as diverse as Apple Inc.(NASDAQ:AAPL) and eBay Inc.'s (NASDAQ:EBAY) Skype.

New bids for WebEx? Not likely. Cisco may already be paying too much.

Douglas A. McIntyre is a partner at 24/7 Wall St.

I recently talked with the CEO and founder of WebEx (NASDAQ: WEBX), Subrah Iyar. I wrote about it in a piece for BloggingStocks.com.

Well, yesterday he sold his company for $3.2 billion to Cisco (NASDAQ: CSCO).

Lately, Cisco has been making some interesting deals – and the WebEx transaction certainly qualifies.

To get some perspective, I interviewed Dan Twing, who is the Chief Operations Officer at EMA.

This seems like a big change in approach/strategy for Cisco. Why is it doing this? The opportunity?

Cisco is becoming more and more involved in the management and use of the infrastructure that their traditional products enable. Behind WebEx is a large, sophisticated network and an ability to deliver content and control desktops in ways that are interesting to Cisco.

Cisco had some internally developed collaboration software that they were selling in conjunction with their VOIP technology that was sub par. WebEx is the market leader in collaboration software with 35% of the market. However, WebEx has only 20% of their business from Enterprise sized clients and only 20% from global clients. Cisco can use its distribution channels to penetrate Enterprise clients and global clients and increase WebEx revenues. Webex has strong relationships in the SMB market and can be helpful to Cisco there.

The biggest change for Cisco is the Webex revenue model being one of subscription services, which varies greatly from Cisco's traditional revenue model.

What does this mean for the on-demand sector/collaboration? See more consolidation of other players?

Microsoft (NASDAQ: MSFT) acquired Placeware four years ago, which is the number two player in the market. Raindance was acquired last year by Intercall. The other longstanding players include On24 and Citrix's online family of products including GoToMeeting, GoToWebinar and GoToAssist. I would not expect an acquisition of the Citrix online products separately nor would I expect to see Citrix acquired for these products as the primary motivation. Citrix is interesting for many other reasons beyond their collaboration business and would more likely be acquired for their enterprise software business. ON24 would be the last major player to be acquired. There are smaller startups focusing on integrated video and VoIP that do not have significant market share currently.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

MOST NOTEWORTHY:

• Goldman Sachs added Starbucks Corp (NASDAQ: SBUX) to its Conviction Buy List citing valuation and expectations for margin improvement.

• Southwest Airlines Co (NYSE: LUV) was upgraded to Outperform from Neutral at Raymond James.

• Roth Capital upgraded Pacific Sunwear (NASDAQ: PSUN) to Buy from Hold as they believe positive momentum is beginning to build.

• Molson Coors Brewing (NYSE: TAP) was upgraded to Peer Perform from Underperform at Bear Stearns.

• ThinkEquity upgraded WebEx Communications (NASDAQ: WEBX) to Source of Funds from Sell following the acquisition by Cisco Systems (NASDAQ: CSCO).

• XL Capital Ltd (NYSE: XL) was upgraded to Strong Buy from Strong Sell as the firm believes an unusually low number of natural disasters is causing a sharply positive reversal in fundamental trends.

• Soleil upgraded shares of Doral Financial Corp (NYSE: DRL) to Hold from Sell to reflect the recent sale of the company's New York branches and an improved outlook for the Puerto Rican economy.

• Bear Stearns upgraded Roche Holding Ltd (OTC: RHHBY) to Outperform from Peer Perform and Anheuser-Busch Cos (NYSE: BUD) to Outperform from Peer Perform.

• Countrywide Financial (NYSE: CFC) was upgraded to Market Perform from Underperform at Keefe Bruyette.

This 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

WebEx Communications, Inc. (Nasdaq: WEBX), which develops collaboration technologies, had a blow-out quarter. Revenues increased 22% to $101.9 million and earnings were $16.7 million, which was up from $13.6 million in the same period a year ago.

Recently, I had a chance to talk to the company's cofounder and CEO, Subrah Iyar. Before starting WebEx in February 1997, he worked at a variety of tech companies, such as Quarterdeck, Apple, Inc. (Nasdaq: AAPL), and Intel Corp. (Nasdaq: INTC).

MAJOR PAPERS:

• In today's Wall Street Journal (subscription required):
• Top Banker Woody Young has left Lehman Brothers Holdings Inc (NYSE: LEH), according to people familiar with the matter.
• Google Inc (NASDAQ: GOOG) may have benefited from piracy, according to media companies.
• Tribune Company (NYSE: TRB) is leaning away from accepting offers from outside bidders and may restructure on its own.
• According to Saudi Arabian Oil Minister Ali Naimi, the world oil market is in "much, much better health and balance" now and, if trends hold, there will be no need for further production cuts or increases in supply when members of the Organization of Petroleum Exporting Countries meet next month.
• The Financial Times (subscription required) reported that MasterCard Inc (NYSE: MA) is expected to announce a pilot program with the GSM Association that will allow migrant workers to use cellphones for international money transfers.
• The Deutschland edition of the Financial Times reported that Private Equity is looking at Infineon Technologies ADS (NYSE: IFX).

• According to the U.K. Times, Sanofi-Aventis ADS (NYSE: SNY) has called off talks with Bristol-Myers Squibb Company (NYSE: BMY) over a potential deal.
• The Washington Post reported that thousands of Army Humvees are lacking the Frag Kit 15 armor upgrade, which is not anticipated to be completed until this summer.
• Investor's Business Daily's "The New America" column highlighted Web conferencing leader WebEx Communications Inc (NASDAQ: WEBX).

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• Adobe Systems Inc (NASDAQ: ADBE) was initiated with an Outperform rating and $47 target at Credit Suisse. The firm said Adobe is one of the best-positioned large-cap software companies given its leading position in digital media and growing presence in enterprise mobile and Web 2.0 markets.

• CA Inc (NYSE: CA) was initiated with a Hold rating and $27 target at Jefferies. While CA is being looked at by private-equity players, Jefferies believes shares are richly valued.

• DSW Inc (NYSE: DSW) was initiated with a Sell rating and $30 target at Wedbush, as they believe the consensus' 3-5 year annual EPS growth rate of 20% to be too high.

• Credit Suisse started Southern Union Co (NYSE: SUG) with an Outperform rating and $33 target.

• Needham assumed coverage of Ikanos Communications Inc (NASDAQ: IKAN) with a Hold rating, as the firm believes a rebound of VDSL spending is unlikely until the second-half of 2007.

• Morgan Joseph is positive on Denny's Corp (NASDAQ: DENN) improving operations and started the food retailer with a Buy rating and $7 target.

• Jefferies started HMS Holdings Corp (NASDAQ: HMSY) with a Buy rating and $25 target. The firm believes HMS Holdings is positioned to serve the needs of government healthcare programs.

• Credit Suisse initiated WebEx Communications Inc (NASDAQ: WEBX) with a Neutral rating at $50 target based on valuation.