The Good News for Radvision from Cisco's Acquisition of Rival Tandberg

by: Shlomi Cohen

When three giant companies, like Cisco (NASDAQ:CSCO), Abbott Labs (NYSE:ABT), and Xerox (NYSE:XRX), announce deals in the same week, at a combined value of $15 billion, mostly in cash, you tend to believe that the executives at those firms, some of whom went through company-threatening crises in the past, see good things ahead in the middle to long term.

The acquisitions are good news for the market, but the Cisco deal is threatening to Radvision Ltd. (Nasdaq: RVSN), which I hold in my portfolio measured at "Globes".

The deal is a threat but not an existential one, in my opinion. Not one that justified the "haircut" it underwent in New York over three trading days last week, when investors knocked off its entire value, net of its $6 cash per share - and then some. I write three trading days because already on Wednesday, before Cisco's announcement, there must have been those who knew and sold the share, which dropped 5%.

The media and analysts already covered all the negatives for Radvision of the Cisco deal to buy Tandberg (OTC:TADBF). Most of the stories focus on Radvision losing 40% of its sales, but I will try to show the potential positives that be generated over the longer term.

By paying $3 billion for Tandberg, Cisco essentially put video communications - Radvision's niche - on the map. It became an immediate strategic goal for Cisco - along with sales of routers and switches and not just one of seven "advanced" technologies, with long term sales targets of $1 billion per year each.

Now Cisco's competitors like HP (NYSE:HPQ) and IBM, or Microsoft (NASDAQ:MSFT), some of whom depended on Tandberg's equipment, will look for replacements, and there are not a lot of companies in the world like Radvision which can immediately contribute to them technologically. In the end user equipment sector, there is Polycom (NASDAQ:PLCM), a major competitor to Tandberg.

A similar process unfolded this year in the server and data center sector, when Cisco announced a massive entry into that sector. In response, IBM and HP disconnected immediately from Cisco as a supplier for communications solutions, and turned to its rivals, Juniper (NYSE:JNPR) in routers, and Mellanox (NASDAQ:MLNX) in the high speed communications niche.

We always thought that Radvision, headed by CEO Boaz Raviv, was an almost definite acquisition target for Cisco, as a type of development center in video communications. But, it turns out that just like there are banks which are "too big to fail", there are also companies which are "too small to buy", and that's what happened to Radvision. Cisco wanted an immediate presence in this market, and through Tandberg it gets $800 million in annual sales, in a $2 billion market, most of which is end equipment.

Radvision, on the other hand, does not sell end equipment at all in the video communications sector, just the video and audio technological infrastructure. Among other things, Cisco integrated Radvision's solutions in three systems for corporate video communications TelePresence, MeetingPlace, and WebEx, in addition to other systems which haven't yet been brought to market.

It is logical to assume that now the other collaborations that Radvision has, such as with IBM, Microsoft, Sony (NYSE:SNE), Alcatel (ALA), or Samsung (OTC:SSNLF), will deepen. It has a window of up to 3-4 quarters during which it will try to grow its sales to Cisco competitors, after which it will begin to gradually lose Cisco as a customer. It should be noted that Cisco decided to begin at the top end and expensive part of the market, with systems that cost hundreds of thousands of dollars, a niche that Tandberg is nearly not in at all. Switching from Radvision to Tandberg technologies is not a move that can be done with the touch of a button.

Now what needs to be seen is if Radvision chairman Zohar Zisapel, who owns 25% of Radvision, will take advantage of the new situation and try again to increase his holding through a partial purchase offer, an undertaking he attempted, and failed at, twice in recent months. The fact that Zisapel owns 25% prevents the company from taking advantage of its cash horde, which is about $120 million, and launching a share buy-back program. That is because reducing the number of shares automatically raises Zisapel's stake, which according to Israeli law is only possible by a purchase offer to anyone over a 25% stake.

Disclosure: Author holds Radvision shares as part of his portfolio tracked by "Globes".

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009. Republished on Seeking Alpha with full permission.