The Mercator Capital Newsletter is out online for this month here. I really like this one. It's something I watch for every month, and I encourage everyone to subscribe. I'm only going to comment on two stories this month, and I see them as related. Click the headline to read each full story, and the link above to read the whole newsletter. It's worth your time.

Microsoft Acquires Tellme

Acquisitions continue to be a dominant theme for 2007, and March was no exception. On March 14, Microsoft made its latest move by acquiring privately held Tellme Networks, in a deal estimated to be worth between $800 million and $1 billion – Microsoft’s fourth largest deal ever. Tellme has developed leading applications in areas that are fast becoming mission-critical for Microsoft, namely speech recognition and voice search.

Tellme was founded in 1999, and raised $239 million in its early days. They claim to be profitable and processing some 40 million calls per month on their hosted platform, which includes a 411 information search application. Given the reported purchase price, this represents an attractive exit for the company’s investors. This amount is also in line with what both Microsoft and Cisco are spending as they jockey for position to become the vendor of choice for enterprises converging their networks and adopting powerful unified communications platforms.

The other story is this one

Art of the Deal - Cisco Acquires WebEx

On March 15, Cisco announced the biggest deal of the year so far in the IP communications market. Cisco acquired WebEx in a cash deal valued at $3.2 billion, and with it, becomes the leading provider of hosted web conferencing and collaboration services. We like this deal for a number of reasons, not the least of which is the last word in the previous sentence – “services”. With WebEx, Cisco is not acquiring more hardware, nor are they acquiring systems or solutions. They are acquiring services – software-based services – which is something we feel will be key to their growth plans.

At face value, the attraction for WebEx is easy to see. The company has substantive revenues – $380 million – is profitable, and is a market leader. WebEx immediately puts Cisco into the hosted web conferencing business, and is an acquisition they could handily afford. While $3.2 billion is out of reach for most companies, Cisco spent double this amount for Scientific-Atlanta, and the deal is just a small blip in their cash reserves. But at over 8X revenues, the deal certainly represents a significant multiple relative to many other service providers.

These two stories really signal how serious both Microsoft and Cisco are about the unified communications market. And this sotry has been very slow to unfold really. When I think about it, I recall my own past Gorillas or Titans, either way the battle lines are being drawn. This battle has been shaping up for years really.

I think there are a couple of telling points to note. Microsoft buying Tellme for as much as $1 billion sends a future-thinking signal. It's the fourth largest MS acquisition ever, but it touches directly on the future. As ficed mobile convergence and mobile solutions gather momentum, one thing that's going to have to change is how we interface with our applications and services. Voice recognition is likely to be the next frontier in unified communications, enhancing the power and viability of FMC overall. This purchase really shows Microsoft thinking to the future.

Cisco's purchase of Webex puts the Cisco machine at the forefront of web conferencing and collaboration in the enterprise space. Personally, having used Cisco Meeting Place, I hope it rings the death toll on an awful product and refocuses Cisco on real, working collaboration. it adds a different dimension to Cisco's Telepresence initiative in that Webex is live, it's real and it works.

As noted in the newsletter, the challenge for both will be how they exist in a services environment. Neither has done very well at delivering services. They both have always been to focused on widegts/units/licenses.

Still, these acquisitions both reinforce how serious the two companies are about winning.