You're trying to make it look like you have a lot of arguments against Cisco doing more acquisitions, but in reality there are just a few here:
(a) core market unit volume drastically reduced in size for any given time frame due to over capacity in infrastructure and tightening capex spending, i.e. annual market size drastically slow in growth rate or even shrinks,
(b) massive over capacity in production driving down end-user price per unit, ala DELL, GTW etc
(c) leading to shrinking of absolute size of new-add pie
This seems like more of an argument for acquisitions. When the core market slows, you want to have new products to attack new markets. Acquisition is a great way to get only the products that actually work and ship, rather than risking R&D dollars. Certainly, for example, Redback's products work, as do Sycamore's.
Value add comes from the fact that a great product can be leveraged through Cisco's sales force to get spectacular results. Cerent is an excellent example.
(d) coupled with fewer VC venture formation due to imploding exit avenue (no IPOs) and more competitive market place dominated by big boys such as CSCO (doing more of own R&D),
(e) resulting in fewer purchase-able companies,
While this certainly will hurt the pipeline of companies to acquire in 2003, given the 12-36 month company germination time, this shouldn't be hurting the acquisition pool. Plus there are companies that are public with dramatically reduced valuations.
The marketplace is not being made more competitive by the big boys doing more R&D. It is becoming more competitive because 100s of companies were funded over the past few years, all going after the same 20 customers. Add to that a contraction from debt overhang, and you have a very tough market for a new product to gain traction.
All the more reason for a small company with a great product to merge with a large company with an established salesforce.
Unlike Nortel or Lucent, Cisco really does not have debt on its balance sheet, and could afford to bankroll acquisitions. It could also use equity.
(f) necessitating serious in-house research and development efforts,
(g) with smart folks hired on cash compensation, resulting in higher cash cost,
(h) further reducing E in P/E, and lowering P further
These aren't new arguments, just a chain of exaggerated conclusions from the previous. I don't doubt that Cisco will be increasing R&D.
As for cash compensation, that is a grossly overblown projection that has not happened yet. As stock values have decreased, so has the median expected compensation.
My original point still stands. Besides paralysis from getting the core business in order, financially, Cisco is certainly in a position now to acquire great new products to generate growth over the new few years. In fact, in some ways they are in a better position than in previous years, because their contraction in market cap has been LESS severe than the newer companies, both private and public.
- Adam |
