You are on page 1of 6


Section A

Veeresh Goswami
Itishree Dash (PGP/17/083)
Manash Hazarika
Pooja Punjabi (PGP/17/102)
Ritika Sharma (PGP/17/289)

Jan 1997 Cerent incorporated under the name of Fiberlane
Worldwide leader in networking for the Communications, Inc.
internet. End-to-end solutions
May 1998 Carl Russo hired to lead the company as CEO
Manufactures LAN and WAN interconnect
devices including bridges, routers, ATM July 1998 raised $9 ml from Norwest Venture Partners and $1 mn from
Kleiner Perkins
switches, remote access system, etc
Identified need in optical transport network: High performance intelligent
transport system
Revenue derived from activity in the
telecommunications industry 1st product Cerent 454, advanced add/drop multiplexer

Aug 1999: When Cisco was 15 years old, Used its own direct sales force for early adopters
market cap became $225 billion the second
largest in Silicon Valley
Rapidly growing list of customers

Aggressive expansion strategy Oct 1998 Mike Volpi, VP Business Development and Alliances, Cisco
approached Russo

Strategic partnership Cisco invested $13 mn for 9% stake in Cerent

Doesnt operate in Optical transport network
March 1999 Cisco made an offer of $300 mn for entire company with
intent to incorporate Cerent 454 into Cisco product line

Group 8 | Section A | Cerent Corporation 2

poration: Valuation as an independent company
Methodology of
Comparable IPO Data: As the company
had ambitions of an IPO, it is reasonable
to evaluate its valuation based on the
multiples of the other firms Multiples Used Enterprise Value
EV Multiple of NTM (Next Twelve Months) Range (in billions)
EV Multiple of CY 2000 Revenue From EV Multiple of 0.59 to 3.80
The median values of used as all the firms
have gone public at almost the same time From EV Multiple of 0.52 to 6.02
and are working in the same domain CY 2000 Rev
The Original Filing and Todays date have
been considered to observe the change in
DCF Valuation: We have refrained for
going in for DCF Valuation due to the
absence of critical valuation parameters
Group 8 | Section A | Cerent Corporation
nt Corporation: Stock Deal
Assume Cisco issues 80 million shares of Cisco Stock to pay to Cerent, If you assume margins for cerent equal to
cisco after acquisition, at what revenue number would the acquisition be accretive for cisco in FY 2000.

Number of Stocks issued by Cisco : 80 million

Cisco Cerent
The Market Cap of Cerent has been considered same
as that of a comparable firm Extreme Networks Net earnings 3300900000 -6500000
(Exhibit 5)
Data evaluated as per Merrill Lynch projections # of shares 3575000000 10000000
(Exhibit 6) 265200000
Market Cap 2.25E+11 0
An accretive deal would result in revenues greater MPS 62.93706294 265.2
than the calculated amount of 211 million
The revenue growth from the previous year is 186% EPS 0.92 -0.65
but this growth may decline and stabilize at around
P/E 68.16 -408.00
47% (CAGR for Cerents addressable market
according to Exhibit 2)
Group 8 | Section A | Cerent Corporation
of stock transaction vis a vis cash transaction
Risk of successful synergies
In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded in the
acquisition premium will not materialize
In stock transactions, that risk is shared with selling shareholders proportion to the percentage of the combined
company the acquiring and selling company will hold

Tax Consequences
The case purchase of shares is the most tax favourable way for the acquirer to make an acquisition because it offers
the opportunity to revalue the assets and increase the depreciation expense for tax purpose. However, shareholders
of selling company will face tax for capital gains.
Tax treatments for stock financed acquisitions appear to favour the selling shareholders because they allow them to
receive the acquirers stock tax free
Cash deals must be accounted for through the purchase-accounting method
Atleast 90% paid in shares acquisitions can be accounted for under the pooling-of-interests method. This approach
requires companies simply to combine their book values, creating no goodwill to be amortised. Hence, better
earnings are reported
The companies that use stock to base the price of the new shares on the current undervalued market price rather than on the
higher value they believe their shares to be worth this can cause company to pay more than it intends
Theoretically, we feel that Ciscos all stock offer would be more beneficial to Cerent even though its shareholders
share the risk of synergies, they will also reap benefits for growth and value Cisco offers to add to current working
of Cerent. The business is bound to grow and will get higher value due to complimentary nature of Ciscos
business and may expose Cerent to even higher no. of customers and their combined power will be unmatchable
by any competitor in Silicon Valley. Group 8 | Section A | Cerent Corporation 5
Group 8 | Section A | Cerent Corporation 6