MEX

There has been considerable media coverage of a report from ‘The Business’ newspaper that Cisco is considering a bid for Nokia. The Finnish manufacturer’s response: “pure fabrication.”

The rumour has bloomed quickly in the summer desert of news coverage primarily because real newsflow has been slow and the business press would relish the prospect of a large scale tech/telecoms merger.

Although I believe this particular ‘deal’ is unlikely to proceed past its current rumoured state, there is certainly a logic to it. If you read the original report in the ‘The Business’, the story grew from an assertion by Cisco CEO John Chambers that it made sense for his company to acquire or merge with a large wireless infrastructure player. As Nokia obviously falls within that category, the rumour was started…

Chambers is correct. It makes a great deal of sense for Cisco to acquire a player with strengths in mobile telecoms infrastructure. Convergence is occuring all around us – desktop PCs used as telephony devices, telephony devices communicating over networks previously reserved for desktop PCs. A merger of Cisco’s strengths in IP and the cellular expertise of mobile telecoms infrastructure provider would enable the combined company to drive the development of standards in this area and deliver truly converged platforms to its customers ahead of the competition.

It is less clear why Nokia would be the ideal choice for Cisco. Nokia’s networks business is compartively small compared to its handset operations (representing about 20 percent of annual revenue). Cisco would either have to buy the network business seperately or find a way to justify a move into handsets to its shareholders.

A full merger of the two companies would dramatically change both Cisco’s and Nokia’s revenue profile, prompting a re-rating of both stocks. Given the commoditisation occuring in the handset space, the increased exposure to this sector may not be favourably received by investors.

Perhaps Ericsson would make a better partner? There may be competition concerns to overcome given the Swedish company’s strength in some of Cisco’s markets, but the combined entity would be an unrivalled leader in telecoms and computing infrastructure. It would also have the advantage of access to handset technology through the Sony Ericsson joint venture, but without the significant commitment to this area that a Nokia merger would entail.

Expanding a company’s influence throughout the value chain of the industry in which it operates is symptomic of the economic cycle. During the TMT boom of the late 1990s, we saw numerous companies pursuing acquisitions which were basically attempts to buy the links of the value chain nearest to them; the rationale was if you brought a previously out-sourced function in-house, you would be able to save money. Just a couple of years later, when the economic cycle had turned, the same companies were disposing of these non-core businesses in an attempt to slim down and generate cash flow.

If Cisco is to avoid this pitfall – and its overall record with acquisitions is actually quite impressive – it must recognise the unique opportunities presented by acquiring mobile telecoms expertise. The success of the merger will be judged on its ability to drive convergence across computing and telecoms industries.

When you buy control of more of the elements of the user experience, you need to ensure you have an overall vision for how you want that experience to feel.