Why Cisco paid $3.2B for WebEx?

GigaOm says that Cisco's move (a smart one) to buy a company that had sales of $380 million, and a net income of around $47 million is actually part of a bigger chess game the company is playing against Microsoft. GigaOm has this chess game all figured out.

Cisco gobbles up WebEx for $3.2 billion

Cisco Systems Inc. agreed to buy WebEx Communications Inc., the largest provider of Internet teleconferencing services, for $3.2 billion to counter Microsoft Corp.'s expansion in the market.

WebEx investors will receive $57 a share in cash, the companies said in a statement today. The offer is 23 percent higher than the Santa Clara, California-based company's closing share price of $46.20 yesterday.

Cisco will add WebEx's services to products for making phone calls, sending messages and holding meetings over the Internet, allowing for integrated communication. The company and Microsoft, which bought WebEx rival PlaceWare Inc. in 2003, are battling for corporate customers who want to simulate face-to-face meetings.

"It's a very attractive market, a growth market,'' said Ari Bensinger, an equity analyst at Standard & Poor's in New York. He has a ``hold'' rating on the shares and doesn't own any. "We like the video conferencing aspects of this deal. Cisco provides the corresponding pieces for this.''

Cisco, the world's biggest maker of computer-networking equipment, said the purchase won't affect earnings excluding some items in fiscal 2008. The companies said they expect the deal to close in the fourth quarter of Cisco's 2007 fiscal year.

Shares of San Jose, California-based Cisco rose 4 cents to $25.89 at 12:03 p.m. New York time in Nasdaq Stock Market trading. WebEx shares surged 22 percent to $56.49 in Nasdaq trading. The stock had gained 32 percent this year before today.