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Polycom to Acquire PictureTel for $362 Million

If you have one of those starship-shaped conference phones somewhere in your office, then directly or indirectly you've probably heard of Polycom. On Friday, Polycom (www.polycom.com) announced that it will be acquiring PictureTel ( www.picturetel.com) for $362 million in stock and cash. The acquisition of PictureTel by Polycom consolidates the top two players in the U.S. video conferencing industry, which has the rare distinction of thriving in the sagging economy as companies seek to avoid travel expenses.

"Macroeconomic factors have been a huge catalyst for people to invest in video conferencing. In some cases, for the cost of a round-trip business trip, you can buy an entire system," notes Jennifer Sigmund, director of product marketing for Polycom.

Polycom sold 10,426 group video systems in the first quarter 2001 which is up 31 percent when compared to the 7944 units sold in the first quarter of 2000. Polycom undercut the entire market when it entered it in 1998, offering different levels of solutions under $10,000 as compared to the previously typical price of $50,000 for a video conferencing system. Broadband LANs and ISDN networks were the factor that largely contributed to Polycom's ability to more efficiently deliver video.

"PictureTel's core competency in PC-based video products will augment our leading appliance-based solutions to drive the communications industry from an early-stage, low-penetration technology to the mainstream solution that video now promises to be, '' said Bob Hagerty, president and CEO of Polycom, in a statement.

According to Ned Semonite, executive vice president of marketing at PictureTel, the merger of the two companies will also allow the new Polycom to more effectively expand beyond video conferencing and into the broader rich media communications arena. Semonite noted that the addition of PictureTel's technology will also give Polycom the ability to offer more data-intensive applications that tend to be PC-based.

The terms of the agreement are that Polycom will purchase all of the outstanding shares of PictureTel for a combination of 0.1177 shares of Polycom common stock and $3.11 in cash for each share. Based on Polycom's closing stock price on Thursday, the value of the deal is $362 million. The deal has been approved by both companies' board of directors, but is subject to the customary regulatory and shareholder approvals.

Prudential Securities on Friday, revised its target price for Polycom, given its acquisition of a main rival, upwards to $33 as compared to its previous estimate of $30. Polycom's stock is closed at $28.36 on Friday.

There may be a hitch in the acquisition, though, as RSI Systems today filed suit against PictureTel Corporation alleging patent violations. John Harris, president and CEO of RSI Systems, Inc. said, "We have heard rumors throughout the industry that PictureTel plans an imminent announcement of a potential sale of the company to a buyer from within the video conferencing industry. We felt that in order to protect RSI's interests, a suit prior to any pending acquisition would be the best course of action."

PictureTel's Semonite states that he does not believe that the suit will interfere with the acquisition.

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