October 14th, 2009 | by admin |
By Karen Brettell
NEW YORK, Oct 14 (Reuters) - Cisco Systems Inc (CSCO.O ) mayturn to the debt markets to fund further acquisitions after itspurchase of Starent Networks Corp (STAR.O ), though thecompany's strong credit profile is not expected to suffer.
Cisco on Tuesday said it would buy the wireless equipmentmaker for $2.9 billion, its second major acquisition thismonth. For details, see [ID:nN13179321]
The cost to insure Cisco's debt with credit default swapsjumped by around 3 basis points to 35 basis points on the news,or $35,000 per year for five years to insure $10 million indebt, according to Markit Intraday.
"Recent multibillion dollar acquisitions represent asignificant acceleration in Cisco's pace of acquisitions,"CreditSights analyst Zhiping Zhao said in a report.
"We expect Cisco to be involved in more large scale dealsand issue more debt," she said. "However, we do not expectthose to materially weaken Cisco's credit profile."
Standard & Poor's confirmed it's A-plus rating on Cisco onTuesday, the fifth highest investment grade, with a stableoutlook.
"We had factored the potential for opportunisticacquisitions into the rating," S&P analyst Richard Sidermansaid in an interview.
"The ratings can withstand further modest acquisitionactivity. Certainly, and especially for a large acquisition, wewould examine not only the financing plan but the impact oncash flow and the strategic implications," he added.
Cisco had $35 billion in cash as of July 25, compared with$10 billion in long term debt.
Much of the company's cash is held in its overseasoperations, however, and the Starent acquisition willsignificantly deplete its warchest for further U.S.acquisitions, CreditSights' Zhao said.
Cisco management said in a conference call on Tuesday thatit will continue to aggressively pursue acquisitions and it isconfident in its ability to tap the debt markets if needed tofinance purchases.
Meanwhile, Cisco's acquisition of Starent and videoconferencing company Tandberg, which was announced on Oct 1,will boost its cash flows and may give the company more room topay down debt.
The acquisition of Starent should add around $250 millionin annual revenues to the company, Gimme Credit analyst DaveNovosel said in a note.
"We believe the company can maintain leverage as it usesits enormous free cash flow to reduce debt following thesetransactions," he said.