March 15 (Bloomberg) -- 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, the world's biggest maker of computer-networking equipment, will offer a combined service that includes WebEx with its products for online phone calls and messages. The company and Microsoft are battling for corporate customers who want to simulate face-to-face meetings, a business that may more than double by 2011, according to researcher Frost & Sullivan Inc.

``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 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 fell 4 cents to $25.81 at 4 p.m. New York time in Nasdaq Stock Market trading. WebEx shares surged 22 percent to $56.38 in Nasdaq trading. The stock had gained 32 percent this year before today, valuing the company at 41 times last year's earnings.

More Customers

The purchase, Cisco's largest since the acquisition of Scientific-Atlanta Inc. last year, gives Chief Executive Officer John Chambers increased access to a market that is growing faster than its traditional business for switches and routers. WebEx's services for holding conferences on the Internet and sharing Web- based documents focus mainly on small and medium-sized companies.

``We have a lot of strength in voice and video, which we think can help to improve their user experience,'' Cisco Chief Development Officer Charlie Giancarlo said in an interview today.

Cisco jumped into the video-conferencing market last year with the release of TelePresence, a Web-based system that transmits life-sized images to remote conference rooms. Giancarlo said in December it may be the quickest Cisco product to reach $1 billion in annual sales.

Growing Market

Demand for conferencing services is rising as companies look to slash spending on hotels and plane tickets. By using TelePresence, Cisco expects to cut its own travel-related expenses by 20 percent, Chambers said last year. WebEx customer Automatic Data Processing Inc. said the Web-based program allowed the company to save 20 percent on training costs.

Frost & Sullivan predicts the global Web-conferencing market will reach $2.1 billion in annual sales by 2011, compared with $753.8 million last year.

The purchase of WebEx is the second deal for Cisco this week. The company on March 13 agreed to buy NeoPath Networks to gain the closely held company's storage technology. Other acquisitions this year include Five Across Inc., to add social- networking software, and Reactivity Inc., whose technology helps companies do business on the Internet.

Microsoft Competes

In a challenge to Cisco, Redmond, Washington-based Microsoft will start testing Internet-calling features for its Office software this month and expects to have 100 million workers using the technology within three years. The company bought WebEx's smaller rival PlaceWare Inc. in 2003, gaining programs that allow people to work together over the Internet.

WebEx has a 65 percent share of the market for Web-based meeting services and Microsoft is its biggest competitor, WebEx Chief Executive Officer and founder Subra Iyar said on a conference call. The company, which first sold shares to the public in 2000, has reported annual sales gains of more than 20 percent for at least five years.

Revenue at WebEx jumped 23 percent to $380 million last year, while net income declined 8.4 percent to $48.6 million. Credit Suisse analyst Jason Maynard in San Francisco estimated 2007 sales of $457 million in a note to clients last month and called the shares ``modestly undervalued.''

To contact the reporters on this story: Ron Day in New York at rday1@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: March 15, 2007 16:20 EDT