Given all the deals Cisco Systems Inc. (NASDAQ:CSCO) does, and all the discussion about its skill in doing them, it's only fair that someone should make a contrarian case. But at least as sketched by Robert Cyran of Breakingviews on Monday,
the case has a couple of holes.
The most obvious is Cyran's apparent assumption that Cisco pays for its acquisitions mainly with stock. In fact, it relies more heavily on cash. A quick scan of The Deal Pipeline shows that cash deals include Scientific Atlanta in 2005 (still its biggest deal at $6.9 billion) and WebEx in 2007 ($3.2 billion). The three deals Cisco has announced this fall were all for cash as well: Scansafe Inc. ($183 million); Starent Networks Corp. ($2.9 billion); and Tandberg ASA ($3 billion).
And why wouldn't Cisco acquire with cash? The company has around $35 billion of it.
Cyran is at least aware of Cisco's other main use for its big supply of folding money. He doesn't approve, though. Nearly $60 billion in share buybacks since 2002 have served mainly to mop up extra shares generated by the option grants the company favors in compensation packages, he reckons. This is a familiar and reasonable complaint about share repurchase plans, especially by tech companies. You can find a fuller discussion in this 2006 BusinessWeek
piece, which, interestingly, credits Cisco as being among the better companies at actually retiring shares (though it is faulted for how it funded the buybacks). Well, maybe that was then.
But here's the heart of the matter. Cyran conceives of these two activities -- share buybacks and "buying up rivals," as he puts it -- as the two pillars of Cisco's strategy, which in his view hasn't worked because investors who bought 10 years ago have received no return on their investment.
Now, we can all feel sorry for the investors who bought in late 1999. The share price ($23 on Monday) is nowhere near its Internet bubble peak of $77 in 2000.
But this is a reductionist view of corporate strategy, to say the least. Cisco hasn't been buying rivals so much as it has been trying to extend its reach and stay a step ahead in a fast-changing sector. And if you compare its commercial successes to those of actual rivals -- say, bankrupt Nortel Networks Corp. or struggling Alcatel-Lucent SA (NYSE:ALU), product of the kind of megamerger Cisco has eschewed so far -- the company looks pretty good.
Perhaps Cisco's move from network infrastructure into video, security and even data centers will turn it into an unwieldy company, another of Cyran's charges. Perhaps it should also be using its huge cash hoard to start paying a dividend, as Microsoft Corp. (NASDAQ:MSFT) finally did in 2003 after years of complaints.
Or not. Regardless, the business strategy that enabled Cisco to generate all that cash and made it one of the surviving giants in a consolidating IT and communications business can't be so casually dismissed. -
Kenneth Klee
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Juergen Lasowski
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Hi-
I'm not sure why you think I assume Cisco did its deals mainly in stock. One of points I made was that paper acquisitions are no longer very attractive because Cisco's multiple has contracted.
-Rob