Cisco learns lesson as it finally snares Tandberg

LONDON/NEW YORK Fri Dec 4, 2009 9:56am EST

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LONDON/NEW YORK (Reuters) - Cisco Systems Inc's (CSCO.O) veteran dealmakers may have learnt some new lessons from their drawn-out pursuit of Norway's Tandberg ASA TAA.OL, the video conferencing leader.

Cisco could be more careful about talking up the benefits of future deals, and thus making it hard to be firm on price.

It has also discovered the hard way that Scandinavian investors can be tough opponents if they think a deal is undervalued.

On Friday Cisco said it had control of more than 90 percent of Tandberg, allowing it to squeeze out remaining shareholders, after it sweetened its offer about 10 percent to $3.4 billion.

Cisco's initial offer met strong resistance, despite backing from Tandberg's board -- a marked difference to its usually smooth dealmaking, honed through many deals in the past decade that helped make it the world's largest network-equipment maker.

Less than a tenth of Tandberg shareholders accepted the first bid. Chief Executive John Chambers said the challenge was expected, but analysts said Cisco was caught off guard.

In a sign Cisco believed the deal would go through without a hitch, executives repeatedly emphasized the merits of the deal before winning shareholder approval.

That made it hard for the company to later play hardball, and few investors believed Cisco executives when they threatened to walk away, citing "fiscal prudence."

"I think in the future this is something they will work to avoid," said Brian White, analyst at Ticonderoga Securities. "It was certainly a learning experience."

Cisco eventually raised its bid by about 1.8 billion Norwegian crowns ($323 million) -- hardly a dent in Cisco's cash pile of $35.4 billion at the end of the last quarter.

Some analysts say, though, that risks setting a bad precedent as Cisco eyes more deals overseas, marking it an easy target for demands to up offers.

However, Peter Germonpre of Panta Capital, a small firm advising on merger arbitrage that publicly opposed the offer, said Cisco may have been "very clever" by starting with a low offer which it privately believed it would have to raise.

SCANDINAVIAN TRADITION

Cisco also ran into something of a Scandinavian tradition: aggrieved investors and brokers, quick to demand better terms.

This happened in the 2006 leveraged buyout of Sweden's Gambro, and the 2007 hostile takeover of Norway's Eastern Echo by Schlumberger.

In Tandberg's case, local investors were also reluctant to see the company, which they value because it helps diversify their portfolios, handed over so easily.

Local and international investors owning 30 percent-plus of Tandberg stock quickly mobilized to decry the offer as cheap, with all the touted synergies accruing to Cisco.

Many complained that the premiums and valuation multiples cited by Cisco were misleading. Some compared the offer with a high premium Cisco agreed later in October to pay for wireless equipment company Starent Networks Corp (STAR.O).

FEES

Emphasizing the value of local knowledge, Cisco adviser Lazard (LAZ.N) will have to share its spoils with Nordic house Carnegie, whose role expanded as it became clear Cisco's initial approach had misfired.

The Stockholm office of Lazard was initially Cisco's sole financial adviser. But as Cisco upped its bid, and won crucial backing ahead of time from more than 40 percent of shareholders, it upgraded the Oslo office of Carnegie from an administrative role as receiving agent to joint financial adviser.

That may have helped win over key Norwegian shareholders including its biggest shareholder, Folketrygdfondet, which invests Norwegian state pension funds.

Freeman & Co, the merger consultancy, estimates the duo may earn fees of $17 to $19 million for the deal.

JPMorgan (JPM.N), which provided financial advice to Tandberg and a fairness opinion to the company's board, stands to earn $18 to $20 million, according to Freeman's estimates.

($1=.5989 Pound)

($1=5.570 Norwegian Crown)

(Additional reporting by Wojciech Moskwa in Oslo; Editing by David Cowell)

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