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Optical/IP

Cisco's See-Saw Day

Cisco Systems Inc. (Nasdaq: CSCO) CEO Chambers, who spoke Tuesday at a Salomon Smith Barney investment conference, has hinted once again at market-share gains and Cisco's plans to acquire as many as 12 companies that will add products or services to the company’s offerings in 2002.

The news was enough to bump Cisco’s stock price up almost 4 percent, rising from $21.26 per share to $21.77 by late afternoon. But a quick and sudden selloff in the late afternoon pushed Cisco back into the red, and it closed at 20.84, down 0.11 (0.53%).

What happened? Perhaps reality sunk in. Though Cisco may be consolidating its lead in the enterprise market, it's not clear that growth in that market will come roaring back anytime soon. And the market is still waiting to see how Cisco's new acquisitions strategy, which represents a departure from the old one, unfolds (see Cisco's Appetite for Startups Shifts).

The acquisitions Chambers talked about will probably help Cisco offer an even more inclusive solution package. While there is no word on which specific companies Cisco has its eye on, most analysts agree that it won’t be going for the big public ones.

“They’ll return to classic Cisco strategy,” says Steve Kamman of CIBC World Markets. “Buy a small company with a fully developed product, and then leverage their distribution. I don’t think they will buy a large public company with an already installed customer base. They have plenty of options in the valley.”

“I really think it’s going to be small startups,” Arian Mahler, an analyst with Dresdner Kleinwort Wasserstein, agrees. “Not Ciena Corp. [Nasdaq: CIEN] or anything.”

At the conference yesterday, Chambers said that Cisco was looking to make acquisitions where it can break into new markets but that they were being cautious. “We only enter markets where we think we can be number 1 or 2, with a minimum of 20 to 25 percent market share,” he said. “We prefer to get there by developing ourselves; that’s safer. But you have to be realistic. If you develop 2/3 of a product yourself and you’re able to get to market with that market share, that’s pretty good. You then... get 1/3 partnering or aquiring.”

Chambers indicated that the company might look to buy storage companies, but his announcement that Cisco has already sunk some cash into the storage networking area caused some indecision as to whether Cisco will move forward with acquisitions or partnerships in that area (see Cisco Reaffirms SAN Strategy). While they’re not quite sure what form it will take, analysts seem to agree that the most natural course for Cisco’s expansion will be into storage and metro optical.

Observers say the bulk of Cisco’s market share growth is happening in the enterprise sector, which makes up about 75 percent of the company’s business. This is a good sign for the company, says Hasan Imam, an analyst with Thomas Weisel Partners, pointing out that up until recently companies like Extreme Networks Inc. (Nasdaq: EXTR) and Foundry Networks Inc. (Nasdaq: FDRY) had been taking market share in the enterprise routing and Layers 2 and 3 switch markets. Now Cisco's getting some of that back, he says.

And how are they doing it? Imam doesn’t think Cisco’s been offering irrational price discounts. “But,” he says, “Cisco is able to offer bundled discounts. They have a huge service-consulting segment that allows them to provide value-added service to customers. That is what has helped them gain market share. They are leveraging their strength.”

CIBC's Kamman agrees: “There is no evidence of price cutting. They give better deals on a broader range, rather than cutting prices.”

Even though Cisco's stock ended up down, analysts say it was important that Chambers was able to step up and say something positive that moved the market in the morning.

“From a psychological perspective, it’s what everybody needs,” Imam says. “Investors needed to see names like Cisco, Nortel Networks Corp. [NYSE/Toronto: NT], and Lucent Technologies Inc. [NYSE: LU] come in and anchor the sector and show some stabilization and growth visibility.”

Not everyone, however, agrees that Cisco’s announcement is good news for the market. “This could be the beginning of a 'rising tide to lift all boats' market,” says Kamman, “but I think it’s more of a winners-losers market. Somebody has to be losing. We just have to wait and see who it’s going to be.”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com
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boson3 12/4/2012 | 11:05:39 PM
re: Cisco's See-Saw Day GÇ£I really think itGÇÖs going to be small startups,GÇ¥ Arian Mahler, an analyst with Dresdner Kleinwort Wasserstein, agrees. GÇ£Not Ciena Corp. [Nasdaq: CIEN] or anything.GÇ¥

Now there's a stroke of genius. Cisco makes an LH DWDM platform. So does Ciena. Cisco makes a metro DWDM platform. So does Ciena. Cisco makes a metro grooming product. So does Ciena.
optigirl 12/4/2012 | 11:05:38 PM
re: Cisco's See-Saw Day Wow...someone out there has a hair across their proverbial butt.

Breaker: Forget your Prozac or something? Get some counseling before you go postal

Jeez.
LRfan 12/4/2012 | 11:05:38 PM
re: Cisco's See-Saw Day From previous Cisco article:
It's a message Chambers has been giving for a couple of months. In another analyst presentation in December, Chambers reportedly said that in 2002 the company will only be acquiring startups with revenue on their balance sheets.

The last thing Cisco needs to do is buy
BrightLink.
sntwk 12/4/2012 | 11:05:38 PM
re: Cisco's See-Saw Day 'Now there's a stroke of genius. Cisco makes an LH DWDM platform. So does Ciena. Cisco makes a metro DWDM platform. So does Ciena. Cisco makes a metro grooming product. So does Ciena. '

You missed one:

Ciena makes long-haul/metro grooming switch. Cisco doesn't. It needs to buy BrightLink or some other startup for that and that too if customer says cisco should buy them!
skipjacks 12/4/2012 | 11:05:37 PM
re: Cisco's See-Saw Day I bet you have never met the guy.... He is one of the more upstanding ones.. You should be worried about your idiot stockbroker not him. For the record, I aint given him nothin' and he aint done nothing for me financially, lest you count him buying me a few beers and me the same..
optobozo 12/4/2012 | 11:05:37 PM
re: Cisco's See-Saw Day Gee, and I thought that 'sinorat' dude lost his cheese in the fondu pot with all the rantings about expensive art and gourmet dinners for hundreds at Quantum Bridge. Breaker's forehead must have been bouncing pretty hard of his keyboard to send so many posts. Whoa....
HarveyMudd 12/4/2012 | 11:05:36 PM
re: Cisco's See-Saw Day The days of Cisco's marketing hype is over. So far Cisco has acquired over 84 companies. These acquired companies. including Cerent, have not offered any significant market value and very little revenue. But these new companies acquired by Cisco were instrumental in making the stock prices very very high -- much more than the true market value. But this trick is not likely to work again as the Cisco's tactics are much more widely understood.

There is not much growth in the enterprise market and thiis situation is not likely tio change in the next two or three years.

I do not know why Cisco should buy a storage company. This field is very crowded and currently there are about 80 company and a total of $2,4 Billion has been invested by the VCs in the year 2001 alone. As usual about 90% of these start-ups would close doqwn or will not have any suitable product for the market consumption. Even if Cisco acquires a storage company, it would not have any impact on the Cisco stock prices.

Metro Optical is also very crowded. In addition the Metro markwet is not expanding to any apporeciable degree. So Cisco's impacyt on the Metro market is almost negligble.

The Cisco stock prices would not rise and would not maintain consistency unless there is a substantial increase in revenue for a period of 4-6 quarters.
halkins 12/4/2012 | 11:05:35 PM
re: Cisco's See-Saw Day Cisco showing a great interest in an EPON play.

http://www.lightreading.com/do...
flanker 12/4/2012 | 11:05:35 PM
re: Cisco's See-Saw Day Despite the fact that I was flamed by some misguided BrighLink fan a few months ago, I concede could see them fill out any major vendor's product line. Unfortunately there's some paranoia about acquiring start ups out there.
(Wonder why.)

I get venturewire daily and I still cant believe those idiots on "Sad Hill" are funding new vendors.
gea 12/4/2012 | 11:05:27 PM
re: Cisco's See-Saw Day Harvey Mudd wrote...

"These acquired companies. including Cerent, have not offered any significant market value and very little revenue"

Uh...what? Cerent offered no signiicant market value and no revenue? You are completely, wildly wrong as usual. Why on earth do you post? You seem to have convinced yourself that you can "figure out" reality and need no knowledge or facts about anything.

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