TECHNOLOGY : IBM, Cisco Strike $2-Billion Deal : Alliance: Cisco will buy billions of dollars in chips, components from Big Blue, which will hand over much of its computer-networking business.
IBM Corp. agreed Tuesday to turn over much of its computer-networking technologies and business to Cisco Systems Inc. as part of an alliance between the two companies valued at more than $2 billion.
In return, Cisco has agreed to buy billions of dollars in chips and components from IBM over the next five years, and IBM will get to handle lucrative consulting and support contracts for Cisco’s corporate customers.
The deal is the latest sign of consolidation in the computer-networking industry, and marks IBM’s retreat from competing with Cisco, Lucent Technologies and other companies that dominate the market for the switches and routers that control data traffic on the Internet.
“IBM made a decision that they can make more revenue partnering with Cisco than competing with us,” said Selby Wellman, senior vice president at Cisco. “We’ve made the same decision.”
Although IBM and Cisco executives touted the synergies of their deal, it appears to pose an immediate threat to at least one of their suppliers, MMC Networks Inc. of Sunnyvale. MMC shares plunged $19.13 to $30.88 before trading was halted on Nasdaq. Analysts said as much as 20% of MMC’s revenue could be in jeopardy because sales to IBM could dry up now that IBM has ceded so much of its networking business to Cisco.
IBM shares climbed $1.38 to close at $124.56 on the New York Stock Exchange. Cisco shares closed up $1.06 at $67.81 in Nasdaq trading.
Analysts said the deal makes sense for two companies that appeared to be headed in opposite directions in the $42-billion market to supply companies with equipment for computer networks.
“IBM has finally resigned itself to being a nonplayer in the data communications industry,” said John Armstrong, an analyst at Dataquest in San Jose. “Cisco is going to enhance its relationship with IBM’s largest mainframe customers, which are some of the biggest companies in the world.”
San Jose-based Cisco controls about 85% of the global market for routers and switches. Its sales have surged in recent years, topping $12 billion for the fiscal year that ended July 31, as it capitalized on the blockbuster growth of the Internet and companies’ efforts to rebuild their computer networks around Internet-based technologies.
Armonk, N.Y.-based IBM has struggled in this market, even as it continues to thrive in other areas of its vast business. Earlier this year it signed a $16-billion deal to supply Dell Computer with storage technology, processors and flat-panel displays. In June it signed a similar, $8-billion deal with Acer Group Inc., a Taiwan-based computer maker. About 6% of IBM’s revenue last year came from parts sales.
As part of the deal, IBM has agreed to turn over to Cisco patents and other rights to networking technology it has developed.
Other recent networking industry deals include Nortel Networks’ purchase of Bay Networks for $9.1 billion in June 1998 and Lucent’s acquisition of Ascend Communications for $20 billion earlier this year.
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