Cisco's options, as Tandberg bid faces opposition

NEW YORK/LONDON Fri Nov 6, 2009 3:05pm EST

NEW YORK/LONDON (Reuters) - U.S. network equipment maker Cisco Systems Inc (CSCO.O) faces a touch choice as the Monday deadline approaches for its $3 billion tender offer for Norwegian video conferencing company Tandberg ASA TAA.OL.

Investors holding about 30 percent of Tandberg's shares have demanded a higher price than the 153.50 crowns ($26.93) per share that Cisco offered, which presumably means that the U.S. company will not get the 90 percent shareholder approval that it would need to close the acquisition.

Here are some possible scenarios for Cisco:

EXTEND OFFER AT CURRENT PRICE

The one-month tender offer expires November 9 at 1730 CET (1630 GMT). Cisco could extend the deadline and continue to negotiate with shareholders for a maximum of 10 weeks, or until mid-December.

If Cisco extended without changing the terms, and Tandberg shares and the overall market fell, some investors might reconsider their resistance, analysts say. However, Most expect an extended offer would lead to a higher bid.

RAISE BID

Many analysts expect Cisco to raise its offer, or sweeten the bid in some way, because the company has said that online video communications will be a key growth area.

Peter Germonpre of Panta Capital, a small London firm advising on merger arbitrage, told Reuters a fair value would be at least 170 Norwegian crowns. Tandberg shares closed flat at 151.00 Norwegian crowns on Friday.

"We believe Cisco will go the extra mile to complete the deal due to Tandberg's vital role in Cisco's collaboration strategy," said Danske Markets Equities analyst Martin Stenshall.

He sees "a greater probability, a 75 percent likelihood, that Cisco will increase its bid, rather than walk away from the deal, a 25 percent likelihood."

WALK AWAY

Some analysts, however, said that raising the bid could set a bad precedent for Cisco, particularly as it has said it expects to buy more companies to further diversify its business from the routers and switches that direct Web traffic.

Cisco Chief Executive John Chambers said earlier this week that he believes the Tandberg deal will be closed, but he also threatened to drop the offer.

"We've already walked away from a couple of deals this year where we could not get the right pricing," he said. He told Reuters: "There's no acquisition that is a must-have."

Some analysts think that this is just rhetoric from Chambers and that Cisco is unlikely to abandon its quest for Tandberg after touting the benefits of the merger so aggressively.

If Cisco really walked away, Tandberg shares would be expected to fall. The stock had closed at 138.30 crowns a day before Cisco's bid was announced. At that point, Tandberg had already risen around 45 percent since the start of the year on speculation that it was an acquisition target.

ACCEPT SMALLER STAKE

Cisco could waive some conditions of the deal, particularly the requirement that 90 percent of Tandberg shareholders must tender their shares, accept a smaller stake in the company and increase its holding over time.

The question is whether a 70 percent stake -- assuming all the opposing investors refused the tender -- would be enough for Cisco to feel confident that it could manage the company effectively.

Also, some Tandberg shareholders who accept Cisco's tender offer could add a clause seeking additional compensation if Cisco offered a higher price a few months later to buy the remaining shares. It is unclear whether Cisco would accept such demands.

RIVAL BID

Most analysts see a rival bid for Tandberg as unlikely, given the size of the deal.

But they have said Cisco's offer, regardless of when and how it closed, could trigger more deals involving video conferencing firms like No. 2 player Polycom Inc (PLCM.O).

Other technology companies like Hewlett-Packard Co (HPQ.N) also offer high-end video conferencing.

($1=5.701 Norwegian crown)

(Reporting by Ritsuko Ando and Quentin Webb, editing by Tiffany Wu and Gerald E. McCormick)

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