Last week?s multimillion pound acquisition of US Robotics (USR) by 3Com was the biggest ever deal in the networking industry, and one that may have the networking number one, Cisco, quaking in its giant-sized boots.
With a market valuation of about $35 billion, Cisco is the third largest company on the Nasdaq stock market after Microsoft and Intel. As the leading manufacturer of routers, it provides more than 80 per cent of the backbone routers of the global internet. The hybrid result of last week?s $6.6 billion deal is projected to turn over $5 billion this year, while Cisco is projected to turn over $6.5 billion in FY 1997. 3Com will have 12,000 employees spread across 130 countries and Cisco 6,700.
Cisco publicly claimed that the merger, which creates the second largest networking firm in terms of revenue, was rather flattering ? another example of competitors reacting to its leadership. Stating that more than 50 per cent of all large mergers or acquisitions were doomed to failure, a senior representative of Cisco said the move came as no surprise. But he went on to say that the two companies must share a common vision if the merger is to be a success.
?Built from two very hardware-centric companies, the new 3Com doesn?t gain the critical software value customers expect to tie together their end-to-end solution. Large mergers of equals in high-growth markets typically cause both companies to lose momentum.?
Somewhat ironically for the representative of a networking conglomerate, he also pointed to the distance between the two companies? headquarters as another potential problem for the new 3Com.
3Com maintained that it was buying USR to widen its product offerings to include both USR?s low-cost modems for personal computers and its high-end devices which are used by internet service providers. IT pundits have said the goal was to enable 3Com to better compete with Cisco. But that is not all. An increasing number of networking companies are now claiming they can offer credible competition to the previously indomitable Cisco. Newbridge, which purchased UB Networks, has claimed that now it can provide end-to-end networking systems too, Cisco?s monopoly on the market will cease.
Cisco director of channel sales Richard Bradley described the 3Com/USR merger as ?interesting?, saying that with 13 distributors 3Com/USR products would be over-distributed. ?We don?t really see it affecting the end-to-end solutions from the Lan to the Wan. In any case, Cisco doesn?t stand still as an organisation,? he said.
As part of its current drive to break into the emerging small to medium-sized business market, the firm has just announced an accreditation scheme which toughens up its entry standards for resellers.
Now resellers must invest time and money in training to receive premier accreditation before they can have access to Cisco?s products. ?It will make buyers in small to medium-sized businesses much more comfortable about buying through resellers. They will know they are buying from a company that can provide support and services on networking products,? said Bradley.
The majority of Cisco?s resellers seem to have welcomed the move, believing that until now, a lack of training meant many were not equipped to sell and support Cisco products.
Carl Walker, business development manager at Milton Keynes-based reseller INS, said: ?The market was open to abuse. It was not a level playing field. There was a lot of discounting going on in the one-man-and-his-dog companies because of the lack of support structure.?
Andrew Porter, MD of Loughborough-based dealer Netman, said the different accreditation level had even prompted him to become a Cisco reseller. ?If it hadn?t been for their new channel programme I wouldn?t have taken them so seriously. The programme is exciting. They needed to profile themselves more and do more marketing. Now there is no limit to the number of marketing activities they will do with us.?
But for many ? particularly the smaller outfits ? more training means more investment of time and money which they cannot afford. Unable to attain the ultimate gold accreditation, smaller dealers will be excluded from selling to the corporates which demand first-class support and services guaranteed by such training.
Shaun Pryce, MD of The Fractal Partnership, a firm which has won an award from Frontline for its high Cisco product sales, was unenthusiastic about the premier partnership. He said accreditation schemes only came into their own when a dealer was prospecting for new customers. ?If you already have a good customer base then who cares? If businesses believe in going for the highest authorised company, then firms like ours, with a #3 million turnover, can never compete. I won?t be able to be a corporate reseller.?
As far as the SME sector was concerned, he said: ?Such companies are not heavily into IT. A lot don?t know about authorisation so they won?t ask. In any case, I?ve never had any difficulty getting pricing without accreditation.?
Dealers predict that the accreditation scheme will clear the channel of as many as 220 of the less committed resellers.
It is impossible to say whether 3Com/USR will become one of the doomed 50 per cent of failed mergers, but it is unlikely that Cisco will lose much sleep over the prospect of having another networking company breathing down its neck.
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