Cisconokia mania
What a possible Cisco-Nokia merger means for Check Point, and Cisco Israel.
Shlomi Cohen 9 Aug 05 14:05
The event that surrounds the publication of Cisco Systems’ (Nasdaq:CSCO) results is accompanied this time by a new/old rumor that it wants to take over Nokia (NYSE; LSE: HEX:NOK) in other words, a merger of the $123 billion giant Cisco with the $71 billion giant Nokia. It sounds fantastic, especially since it is known that Cisco CEO John Chambers has always preferred acquiring small niche companies. Even during the bubble era, now considered a time of insanity that will not recur, Cisco’s largest acquisition was around $7 billion. Both Cisco and Nokia declined to comment on the rumors, which will probably only increase their circulation.
British daily “Business” published the rumor on Sunday. It claims that Cisco wants to take over the world’s largest wireless infrastructure company in view of the convergence of wireless and wireline communications. Nokia is very strong in wireless communications equipment, especially for 3G. The stunning announcement by Nokia’s charismatic chairman and CEO, Jorma Jaakko Ollila, last week that he was leaving to become chairman of Royal Dutch Shell plc (NYSE:RDS; LSE; AEX: RDSA, RDSB) caused the Cisco takeover rumor to emerge just now, because two charismatic leaders Chambers and Ollila could not be in one company, and one would have to go.
A Cisco-Nokia merger, even if limited to the equipment sector, leaving Nokia’s core business of telephony outside the deal, would involve an interesting Israeli angle, arising from Nokia’s close ties with Check Point Software Technologies Ltd. (Nasdaq:CHKP). Nokia is one of Check Point’s OEM customers, accounting for a third of its IT security sales, which Nokia integrates into products sold to end-users.
Nokia’s equipment competes head-to-head with Cisco’s in the telecommunications market, since Cisco’s products use the company’s own IT security software. Check Point investors ought to very worried by the prospect of the company losing a very large customer should a merger take place. On the other hand, optimistic investors could fantasize that Cisco might replace Nokia as Check Point’s largest customer, and the intense competition between Cisco and Check Point would cease because Cisco would abandon its IT security software. If such a scenario were to occur, it would cause a major problem for Cisco Israel, in view of its managers’ opinion of Check Point.
Check Point’s share has been stuck since publishing good second quarter results, but I’ve recently spotted quite lively action in voice options for the share for the coming months. Options trading last Thursday and Friday exceed 2,000 options for August and September at $22.50 per share. This is a very large turnover for Check Point options, since these are not normally results dates that generate options trading. This trading seems odd to me, since it seems to be related to Check Points’ mergers and acquisitions activity.
As for Cisco and the publication of its financial report, Barney Smith Citigroup is optimistic, predicting that the company will post $6.6 billion in quarterly sales. This is Cisco’s fourth fiscal quarter, and Barney Smith’s forecast is close to the upper limit of Cisco’s guidance of 4-7% growth, compared with the preceding quarter. Smith Barney Citigroup Research analyst Alex Henderson says he spotted at least ten analysts who raised their forecasts for Cisco during June and July, and that the analysts’ average forecast crept upwards as the quarter progressed.
The analysts’ average forecast for Cisco’s earning per share also rose by $0.01 to $0.25. Henderson predicts that Cisco will meet this forecast, but is slightly worried by the over-optimism that has taken analysts in recent weeks about the company’s results will prevent a surprise when the actual results are published, and possibly cause some disappointment in the market. He recommends buying as Cisco’s share falls in the event that the market receives good financials with disappointment and causes the share to fall. He does not expect the share to fall.
In general, Henderson predicts an optimistic conference call, during which Cisco will announce improved gross profits and a slight drop in inventory, and will provide guidance of 0-2% growth in sales for the quarter ending in October, compared with the quarter ending in July, because the quarter ending in October is seasonally weaker.
Cisco’s strongest activity for the present quarter will probably again be sales to communications service providers. Intense competition between cable and telephone companies is driving heavy investment in Internet Protocol (IP) equipment for advanced services. The beneficiaries of this investment are the two largest vendors of this equipment Cisco and Juniper Networks (Nasdaq:JNPR). Large orders from service providers raised Cisco orders-to-delivery ratio to greater than 1 at the end of the quarter ending in April. In other words, it received more orders than it made in deliveries. Henderson predicts that this ratio will persist for the quarter ending in October.
While Henderson is optimistic, Merrill Lynch analyst Tal Liani is rather worried by some trends beneath the surface, although he predicts that Cisco’s results will be in line with its guidance, and he does not expect movement in the share in either direction. Liani thinks that Cisco’s gross profit margin will be affected by weak router sales to large enterprises, and weak sales of large switches, two products with higher than average profit margins.
In contrast to Henderson, Liani thinks that Cisco’s orders-to-delivery ratio will be 1 or less, which will make it harder for the company to provide positive guidance for the next quarter, although he also predicts that Cisco’s management will provide guidance of 0-2% growth in sales. Liani’s model predicts 0.8% growth. He claims that despite the negative trends he identifies for Cisco in the current quarter, the company will meet its targets, by cutting current costs, and, as always, thanks to its aggressive share buy-back program.
Published by Globes [online], Israel business news - www.globes.co.il - on August 9, 2005
The above recommendations were made by a person/s working in the investment industry who may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.
Dubi
