IBasis Inc Case Solution

2. Situation Analysis

i. Relationship between iBasis and Cisco

The first thing that needs to be analysed in this case, is the relationship between Cisco Systems and iBasis, Inc. This is because the relationship of the two parties is an important aspect of any negotiation and shouldn’t be neglected (Sebenius, 2001). 

The relationship started with Cisco seeing profitable opportunities for investment in iBasis. Cisco saw iBasis as a different company than most start-ups in the industry. These start-ups used to operate on razor thin margins to obtain immediate returns. They used to find financing partners, but eventually, end up using the partner's resources and being liable to them to the extent that they had to file for bankruptcy. To Cisco, what iBasis was doing was different as it had been using the internet, which had low costs. Woodman had found their idea to be innovative. This approach of Gneezy and VanderBrug had certain benefits for iBasis at the time and would also in the future as well. These people were able to do something different than what others were doing, which builds on their credibility of being innovative. If they state that they would do the same in the future, after the dot-com bust, they would have a certain amount of credibility attached to them.

The relationship then continued to be a formal partnership between the two companies. It is important to note that Cisco had a partnership with many companies, but its partnership with iBasis was different. At the start, in 1998, an alliance agreement was signed between the two companies by Cisco. Cisco only used to sign these with large companies, but it made an exception in the case of iBasis that was a small company. The two companies also exchanged dialogues and visits with each other. 

The relationship that developed was mutually beneficial. It did not only involve Cisco helping iBasis with infrastructure and capital. iBasis also helped Cisco grow. The case mentions Cisco being able to get China Mobile, which was the largest telephone operator in China, only due to iBasis strong reference. This is important from a negotiation perspective. It is important to understand the other party’s problems and interests in a negotiation (Sebenius, 2001). If iBasis can show that the continuation of the partnership is going to be beneficial to Cisco as well, then it would be able to better convince them.

There were also certain setbacks to the relationship between Cisco and iBasis. The first of these was when iBasis saw a decline in quality of infrastructure (gateways and switches) from Cisco when Cisco provided switches made by its acquired company Summa4. The second of these was when Cisco started to sell to iBasis' competitors. The third of these was when iBasis wanted to expand and developed the Unified Messaging (UM) technology to do so. However, this technology was not successful in the market and Cisco had to reach a settlement where Cisco refunded the investment iBasis had made in its equipment. These setbacks had implications for the relationship between the two companies. They had reduced the credibility of working towards common goals but instead were more focused on individual objectives. This was not to a great extent as the set-backs were accepted by both sides.

ii. The problem for iBasis 

The problems for iBasis started after the Dot-com bubble burst. There was overvaluation of technology companies in the capital markets as investors poured money into them due to optimistic future expectations. This created a bubble that eventually burst, leading to a drop in share prices of these technology companies. Many of these companies ran out of capital and filed for bankruptcy.

iBasis was also hit by the dot-com crash and its share price went to about 3% of its highest value. The company suffered from a loss of about $200 million in 2001. It incurred negative cash flows, wrote off property and equipment, terminated contractual obligations and reduced its workforce. The company had about $210 million in outstanding debt.

The issue that iBasis had to resolve with Cisco was that the company had a current debt of $60 million that it had to pay for the leasing of Capital. Even though the company had $90 million in cash, paying its debt obligations would mean that iBasis would not have enough money to continue to be profitable. The current condition of the financial markets made it almost impossible for technology companies to raise capital. iBasis would have to file for bankruptcy if it paid off its debt. iBasis, therefore, wanted to renegotiate its debt obligations with Cisco. Cisco was offering dent relief to its other customers to prevent them from going bankrupt.

iii. The problem for Cisco

After the dot-com crash, many of the technology companies were facing issues and the partners of Cisco comprised of these companies. These companies had leased technology from Cisco Systems Capital Corporation. They had to pay debts to Cisco. With the dot-com crash, their ability to pay their debts had declined. Cisco, therefore, had to asses which companies to continue partnerships with and which to let go. 

In the case of iBasis, Cisco had the option of recovering all of its debt from iBasis. By doing this, it would lose its partnership if iBasis goes bankrupt. It would also lose on its future opportunities if iBasis was to grow. It is important to know that Cisco does not know that iBasis would go bankrupt as it does not know how much cash iBasis has. It, can, however, infer from the situation that there is a possibility of iBasis going bankrupt. The other option for Cisco was to provide debt relief to iBasis and allow it to continue. This option is riskier for Cisco as it can't determine with certainty that iBasis would survive and not file bankruptcy like the other technology companies. The decision that Cisco goes ahead with depends on the negotiation that takes place between Cisco and iBasis.