Cash-Rich Cisco : On An Acquisition Spree ?
Whilst the IT sector is suffering along with all other sectors of business during the global recession and downturn, the IT sector stands out in one very conspicuous way : It is to a large extend a very cash rich industry sitting on huge piles of cash !
None less so than IT giant Cisco Systems Inc. who sits an impressive second on S&P’s 500’s Richest Companies list only after Exxon Mobil Corp with close to US$ 30 billion in cash in the bank.
Now analysts are beginning to wonder what Cisco will do with all that cash and whilst paying back shareholders through buy backs of shares is one obvious option, most seem to think that Mr.Chambers, Cisco’s CEO, is actively looking into acquisitions now.
Andrew Schmitt of SeekingAlpha.comhas this observation on Cisco’s near future moves :
We acknowledge it is entirely possible Cisco is filling a war chest for acquisitions. Everyone loves to play the who-will-Cisco-buy-next-game (our longstanding bet is Adtran (ADTN)). Cisco CEO John Chambers answered questions in his typical guarded way during an interview last month, indicating “The perfect target is a company with 100 people and a hot product that customers are saying they should go out and buy” and “We do not believe in the acquisition of large peers in any space.”
Cisco could fund such small acquisitions out of working capital, and any large acquisitions could be funded by a bond offering after the announcement, just as they did with Scientific Atlanta. This forces one to ask the question – why did Cisco just decide to triple the amount of cash it has for domestic use if we assume it isn’t for acquisitions?
Schmitt also sees another strategy by Cisco for putting its massive cash pile to good use which he headlines The Bank of Cisco :
We believe Cisco is growing operating cash in order to serve as a lender of last resort to its distributors and customers. An expanded balance sheet will ensure adequate capital is available not just for its own operations, but also the operations of its channel partners and customers.
If a key distributor were to suddenly lose a line of credit because the bank underwriting it implodes, Cisco can step into the breach and act as lender. If a contract manufacturer cannot obtain inventory financing Cisco can extend terms. Just as the Federal Reserve is the lender of last resort for the nations banks, Cisco can become the lender of last resort for the supply and demand chain.
So helping their partners and distribution networks to survive by extending credit lines sounds like a smart move indeed and Schmitt argues well that Cisco’s lower cost of capital is indeed a very useful weapon against its main competitors and not least the likes of HP and Huawei who are nowhere near as cash rich as Cisco.
But who will or should Cisco be buying then ?
MarketWatch’s Benjamin Pimentel, has this menu to suggest :
Chief Executive John Chambers himself has hinted strongly that the company is looking to extend its reach, but he has not yet specified a direction.Data centers“We believe that our opportunities to expand in our current markets, market adjacencies, are actually increasing,” he told analysts in last week’s earnings call. “This is true from the data center to the home market and the service provider to the small business and consumer. … You will continue to see us invest aggressively where appropriate.”It’s a logical strategy, according to analyst Roger Kay of Endpoint Technologies Associates, who said Cisco is one of those companies that “invests for the future” in down times.“It has to diversify,” he said. “It can’t stay in just networking forever.”But where should Cisco look to expand?Given the company’s position as a major player in the market for technology used by big companies, some analysts are naturally focusing on the enterprise arena. For instance, there’s much speculation that Cisco is planning to enter the blade-server market, where it would end up battling it out with the likes of Hewlett-Packard.
Liani also raised an intriguing question: Could Cisco buy a PC company, perhaps as part of its bid to expand in the consumer market?“The question in our minds is whether Cisco will enter the PC market in order to piece together Linksys with its set-tops, and improve delivery of internet content on the TV set,” Liani wrote.But Kay of Endpoint Technologies said moving into the PC market would be a mistake for Cisco. Still, he sees the company penetrating deeper into the consumer market, he said, by buying content aggregators, along the lines of America Online, Facebook or Craigslist.“Not that I’m betting they’re going to, but … these are the types of partners they might look at,” he said, adding that Cisco could also be looking at companies offering software as a service.Chambers himself has fanned speculation that the company is thinking of putting more money into the consumer space.“First, the exciting part about today’s market is just about everybody’s for sale. And the second most exciting part is the prices are pretty reasonable,” Chambers said on the company’s most recent conference call. “In fact, if I were betting, it would not surprise me to see us move on the consumer side before you see us even move on some of the other areas.”In any case, despite a gargantuan pile of cash, Cisco should think carefully about where it plans to spend its money, given the uncertainty in the market, Kay said.
EMC– With a market cap of $24 billion, Cisco would pretty much have to break the bank to buy the storage king. But buying EMC would enable Cisco to take a giant step in achieving priority No. 4: “data center and virtualization.” After all, the folks who buy the storage for data centers probably control more budget dollars than the network czars Cisco deals with. And storage may well turn out to be a more recession-proof business; companies can skimp on new software, servers and network gear, but they’ve got to have someplace to store all the digital records and other bytes that are created every day. Plus, EMC owns 83% of VMWare (see below).NetApp– With a market cap of $4.9 billion, buying NetApp would be a much cheaper way to become a storage industry leader, compared with buying EMC. I know Cisco’s board has considered both of these options seriously in the past. In fact, NetApp modeled itself on Cisco (Cisco essentially created networking appliances, so companies wouldn’t need to buy pricier, proprietary networking technology from vertically-integrated companies like Sun and IBM. NetApp would do the same for storage). This was due in large part to the influence of early investor and current boardmember Don Valentine, the legendary Sequoia Capital venture capitalist who also funded Cisco and a was a boardmember there from 1987 to 2005.VMWare– The pioneer of virtualization is no longer a stock market darling, and now seems caught directly in Microsoft’s crosshairs. But it’s still a technology leader, and with a market cap of $9.5 billion may be the most cost-effective way for Cisco to buy a truly gold-plated data center customer list. And Cisco has been courting VMWare for years. It invested $150 million in the company in 2007, and last year struck up a partnership as it stepped up its data center assault.
End of the day Cisco can afford to buy most companies if they want to - the question seems to be in what direction is the company headed strategy wise ? Chambers is keeping his options open and his cards close to himself for now but the opportunity to buy in cheap is there now so this blogger expects to see some announcements in the not-so-distant future.
