News

If Cisco buys Nokia, will it be sorry? Only if Cisco is dumb enough to do it...

Rumours of Cisco "eyeing" Nokia with a view to a takeover have been published in a Sunday Business report, and widely discussed. It is, almost certainly, not true, say sources - including some inside both companies.

The explanation for the rumours could be terribly simple: there is a takeover in process, involving a Scandinavian wireless company, and it does involve synergy with Cisco's Internet router business, and it is voice-oriented.

But it was announced on July 22, and is only "in the future" in the sense that the deal won't complete till January or February next year; it's the takeover of Danish firm KiSS, which will be integrated into home/small office WiFi and LAN firm, Linksys, as a way of getting into the domestic "digital lifestyle" business.

There are several reasons to doubt that this particular Tony Glover rumour is accurate. At face value, the rumours either imply that Cisco is getting into the mobile phone business (buying the hand-set division) or into the voice switching business. Neither makes obvious sense.

As far as the idea of Nokia's famous ringtone coming out of a Cisco-labelled phone is concerned, few commentators (and quite rightly!) seem to take the idea of Cisco as a GSM/CMDA licensee seriously. So they've moved to analyse the "big iron" businesses, of switching equipment for Internet links.

Perhaps, if commentators understood the problems facing mobile phone networks, they'd be less ready to dismiss idea that Cisco might, after all, be interested the phone handset business.

The fact is, however, that most people in the traditional mobile network are desperately trying to escape from the traditional technology - of the sort that Nokia and Ericsson used to sell - and get into an IP based network, of the sort Cisco sells. Behind the scenes, all Nokia big-iron gear is already IPv6 anyway; its main problem is integrating this with legacy equipment.

But it seems the magic of the sheer size of the phone business still mesmerises observers. They can see the size of the beast, but  perhaps they can't see the size of the tar-pit ahead of it.

The trouble is, when someone goes public with speculation of this sort, the rest of the journalist pack can't be left out. They have to write something, and they have to assume that they've simply been scooped.

Assurances from Nokia that there is nothing there would still not prevent speculation - and Nokia, being Nokia, won't even say that in public.

So, instead, commentators have started discussing the synergy of the Internet and the voice networks, as if it was something yet to come. Sunday Business's take was summarised by Reuters: "The paper said Cisco's mainstay networking market was fast changing with the convergence of fixed-line and wireless networks, and Cisco needed a merger to acquire the technology to create intelligent wireless applications, which Finnish-based Nokia could provide."

It's not an analysis which resonates with people who know the convergence business.

But there are, and have been, many takeover stories about Cisco. The trouble is that the rumours which have sparked all the "Cisco will buy so and so" gossip are pretty clearly based on the idea that Cisco has a big shopping budget. Indeed, Cisco does have a big purse. There is a cash mountain in Cisco - estimated around $5 bn - which has financed acquisitions like the Linksys takeover, and the Airespace acquisition and, now, the KiSS buy.

That's an awful lot of cash: but to buy Nokia, you need ten to thirty times that. Nokia - total corporate capital valuation - is estimated to be worth about $70 bn - and if you take the phone business away, the remaining business is "gear" - telecomms infrastructure equipment like mobile phone exchange switches and the switches linking them - a business which makes around $8 bn a year - and obviously, a takeover valuation of that would be well beyond Cisco's cash reserves. It would have to go to investors and borrow.

The question is: why would it buy Nokia switch gear?

What Cisco does need for the future, is voice-integrated IP - but it already has that, in various forms. Voice over Internet is now widespread in Cisco networks, and is optimised. And the pressure this is putting on traditional phone networks is immense - with the result that they are desperately trying to provide their investors with a plausible description of a viable future, with products like IMS giving them an Internet-like background.

In this case, if there were the slightest sense in merging these two, then it would be Nokia buying Cisco. It needs Cisco far more than Cisco needs Nokia. And to do that, it would be talking to financiers on a huge scale, and it certainly wouldn't be a subject of cautious, dubious speculation; there would be hard-nosed brokers talking it up. There aren't any, apart from one or two opportunists.

If Cisco really is considering buying a set of out-dated technologies so as to manage the transition from voice-only networks to IP based voice, the last thing it would want to buy would be a company that is in the middle of the huge challenge of switching to IP and cutting its prices to match.

It would probably be about as clever as SoftBank purchasing Comdex at its peak, but with a much greater certainty of decline in the market. If Cisco is really planning this, it certainly knows something the rest of us don't know... with the sole exception of Tony Glover. If he's right, he's got the scoop of the decade.