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Bringing Cisco's Money Home

Craig Matsumoto

5:40 PM -- Analyst Zeus Kerravala of Yankee Group Research Inc. is proposing an interesting solution to the question of repatriating funds. He says it should happen, with stipulations that steer the money toward providing jobs, instead of things like stock buybacks.

He blogged about this Sunday for No Jitter, a cousin site to Light Reading, because of the Cisco Systems Inc. (Nasdaq: CSCO) question.

As you probably know, Cisco and lots of other companies have been stashing their cash overseas, hoping that the U.S. government will eventually declare a tax holiday on repatriating the funds. The hope comes from the fact that the government did exactly that in 2004 -- in fact, it looks like companies have intentionally left cash overseas in hopes of another tax break. (See Chambers Floats His Stimulus Plan.)

Cisco's case has a specific twist, Kerravala writes. Its growth has come more through acquisitions than through internal R&D for a long time -- arguably 18 years, dating back to the Crescendo Communications acquisition.

Blogger Brad Casemore backs up that idea, noting that Cisco's R&D pace has decelerated in the past few years.

You'll recall, too, that Kerravala suspects Cisco wants to make fewer acquisitions but make them bigger, something he mentions at the end of his blog entry. The company's new pledge to move faster might translate into striking quickly and thoroughly with a few large targets, rather than picking off a couple dozen squirrels like Versly.

In total: Cisco is probably itching to acquire, but it's not finding the right targets by looking beyond the United States. Repatriated money might give Cisco the leverage to do something really dramatic. "Personally, I'd love to see Cisco go back to its shopaholic ways," Kerravala writes.

Something like Kerravala's plan will probably end up happening, if only because the economy still needs boosting. But I have to be skeptical. Companies are great at finding loopholes. I'd expect them to find plenty of ways to skirt any restrictions -- those that don't get lobbied out of existence in the first place, that is -- to keep shareholders happy and avoid adding costs (jobs). Cisco might put the money to good use, but they would be an exception.

— Craig Matsumoto, West Coast Editor, Light Reading

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12/5/2012 | 4:55:05 PM
re: Bringing Cisco's Money Home

Craig, from the standpoint of American jobs I fail to see advantages to the earnings repatriation proposed that would allow Cisco to make major American acquisitions.  Major tech companies like Acme Packet are already dynamic and successful and providing local jobs.  Aquisition will cut jobs in order to justify the business case in spite of any legislative terms to the contrary.  With Cisco's penchant for manufacturing and R&D export American job loss would be exacerbated by M&A.  The earnings repatriation legislation needs to instead focus on incenting R&D and plant/equipment investment in America to reverse the outsourcing trend.  M&A is not necessarily a bad thing if it were combined with additional American R&D and plant/equipment investment.  Perhaps a 2-3x repatriation tax relief multiplier on American investment could provide additional corporate incentive and help prove-in the business case for American M&A for companies like Cisco that may not be good at organic growth.  American M&A by itself (as well as stock buy-backs, dividends, and bonuses) will do little to grow American technology jobs.  We need incentives for growth investment in America.

12/5/2012 | 4:55:05 PM
re: Bringing Cisco's Money Home

Repatriating funds doesn't guarantee the funds will be used within the US.  IRS rules have created the issue for global companies favoring external growth and treating revenue in a manner restricting importation due to excessive taxation.  The issue is with US tax regulation, US based companies still invest natively but because the taxation is excessive they find it an uneven playing field.   I would be in favor of permanent reduction vs. a one shot every few years, global companies plan accordingly for the best outlook too their bottom line..

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