Tandberg-Cisco deal puts Polycom in play

BANGALORE Tue Oct 6, 2009 10:38am EDT

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BANGALORE (Reuters) - Cisco Systems Inc's (CSCO.O) overture for Norway's Tandberg TAA.OL puts U.S.-based Polycom Inc (PLCM.O) in play as it is the only public company now left in the video conferencing market.

Polycom could also be gravitating toward selling itself as the threat of competing with a behemoth like Cisco looms large, analysts said. On October 1, network equipment maker Cisco said it entered a deal to buy Tandberg for $3 billion.

Polycom might be the best bet left for companies that want to tap the fast-growing video conferencing products market, worth about $2 billion in 2008. Cisco's peers might also want to play catch-up as a key high-growth market ends up in their rival's lap.

"Video has become strategic and there's a limited place to play it," Piper Jaffray analyst Troy Jensen said. "Now that Tandberg is getting acquired, maybe it accelerates the timeframe."

"Polycom is a logical acquisition target for someone," Jensen added.

Polycom and Tandberg control three-fourths of the video conferencing products market. The rest of the market is fragmented with firms like Cisco, with its Telepresence products, Hewlett-Packard (HPQ.N) and privately held LifeSize rounding it out.

Last week, Polycom CEO Robert Hagerty told Reuters the company could be an acquisition target.

It would be tough for Polycom to remain independent over the long haul as Cisco poses a serious threat, analysts said.

"Long term, it's hard to believe Polycom can compete as a standalone company," Morgan Keegan analyst Tavis McCourt said. "They'll probably have to be merged with a tech vendor eventually as well."

Private equity firm Silver Lake Partners, Hewlett-Packard, Alcatel-Lucent (ALUA.PA), Avaya Inc AVXX.UL and Japanese consumer electronics giants Sony Corp (6758.T) or Panasonic Corp (6752.T) could be interested in Polycom, analysts said.

Three or four years down the road, Microsoft (MSFT.O) or IBM (IBM.N) could also look at Polycom, McCourt said.

Silver Lake might be the most likely one as it was considering buying Tandberg last year. The company's investments include Avaya and Skype.

Hewlett-Packard has a limited presence in the video conferencing market and is a player in the high-end telepresence market with its Halo product line.

But will a company actually make a bid for Polycom?

"They (Polycom) would be more willing to be a seller," Jefferies & Co analyst Bill Choi said. "The question is who would buy them and at what kind of price?"

A sale would depend upon the price, but Polycom might be trading too richly to be easily acquired.

Polycom is trading at 22 times forward earnings, while Cisco paid about 23 times forward earnings for Tandberg, the market leader in terms of revenue generation. Polycom, unlike Tandberg, also has a voice business, not considered as valuable as video.

Based on what Cisco is paying for Tandberg, which was 3.1 times 2010 sales, Polycom could be worth $35 to $38 a share if Polycom's voice business is factored, Jensen said.

Polycom shares were trading up 24 cents at $27.18 Tuesday morning on Nasdaq. They have risen almost 70 percent in the last six months.

ADVANTAGE POLYCOM, BUT NOT FOR LONG

For now, Polycom is expected to gain from the uncertainty that clouds Tandberg channel partners, customers or staff.

"The traditional audio/video channel will migrate more toward Polycom. Polycom could cherry-pick some of the sales guys from Tandberg," Piper Jaffray's Jensen said.

Channel partners are concerned about lower margins while doing business with Cisco and the fact that the networking giant might use its marketing muscle to handle large deals itself.

Polycom, whose key partners include Microsoft, HP, IBM and Avaya, could also gain from those who may not be willing to partner with Cisco. At the same time, Polycom might also make inroads into Tandberg partners such as HP and Siemens (SIEGn.DE), analysts said.

"If you look at Cisco's competitors -- and there are a number of them -- some are partners right now with Polycom and others may look to closely align with Polycom," said Brian Nelson, portfolio manager for the AIM Mid Cap Core Equity Fund at Invesco Aim. Invesco Aim is the fifth-largest Polycom shareholder.

Polycom could strengthen its relationship with Cisco's rival Juniper Networks Inc JNPR.O, Nelson said.

The benefits, however, may be short-lived.

"Their largest competitor just got a hell of a lot bigger," Jefferies' Choi said. "Cisco could grow to dominate it. They could be over 70 percent market share down the road."

Cisco might end up with the bigger slice of the pie, Gartner analyst Scott Morrison said. "But the pie ought to grow, so there still should be space for other people," he said.

The video conferencing products market is expected to nearly double to $3.8 billion by 2013, according to Gartner. (Editing by Saumyadeb Chakrabarty and Deepak Kannan)

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