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Corporate Growth Report Weekly, Apr 29, 1996
In its aggressive quest for speed and expanded product line, computer-network equipment supplier Cisco Systems Inc. has assured its lead in the Internet market by acquiring StratCom for $3.7 billion.
The steep offer for the San Jose, Ca.-based computer switch maker is 76 times StrataCom's 1995 earnings of $525 mil. and is a 29% premium over StratCom's recent closing stock price. The price is 59 times expected earnings for 1996.
However, the transaction is a particularly good strategic fit because StratCom's specialty is powerful-high-speed switches for linking far-flung networks -- the fastest-growing segment of the network-gear market The switching market has about $1 billion a year in revenue and is growing at 100% each year. StrataCom's switches are designed o solve one of the most pressing challenges of corporation today -- accelerating connections between networks, especially on the Internet
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Driving the deal is the current trend of corporations to link their networks together through wide area networks and via the internet. Cisco currently enjoys a 60% global market share for routers and an even a bigger slice of the global pie for Internet routers.
In addition, the deal underscores the tremendous expansion and market capitalizations characterizing the network-gear makers today. Cisco is the largest of the gear makers (which include 3Com Corp, Bay Networks Inc. and Cabletron) and reported revenue in the fiscal six months ending Jan. 28 of $1.54 billion. The company has a market capitalization of $26 billion -- ranking third highest on the Nasdaq Stock Market after Microsoft Corp. and Intel Corp. StratCom reported a $3.1 billion market capitalization prior to the deal.
The purchase is a departure from Cisco's earlier excursions on the acquisition trail. Cisco traditionally bought smaller companies to outdistance competitors and increase its product line. For example, Cisco has acquired eight such firms over the past year and a half. With Cisco's marketing clout behind them, these small players have seen their sales skyrocket in some instances, ten-fold.
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