Cisco's See-Saw Day
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