Pity Cisco -- Cisco Can't Just Buy Every Startup In Sight. And What It Can't
Buy, It Will Have To Fight.
Dec. 05, 1999 (LTH - CMP via COMTEX) -- Cisco's got real problems.
Maybe that's hard to see, given its great financials, enviable market
position and solid growth strategy, but the high-flying vendor could be
in for the challenge of its life. A new breed of well-financed and
aggressive startups is aiming to chisel away at Cisco's future-and turn
its "New World" service provider strategy into so much debris. And this
time, Cisco may not be able to buy its way out of the problem. What's
not hard to see is how quickly a highflier can lose altitude in this
market. Look at Newbridge Networks, a circuit-switching manufacturer
that once could do no wrong. Newbridge's stock price is wallowing in
the low 20s-down from the high 50s two years ago-while takeover rumors
circle, morale drops, employees flee, and customers and investors
become increasingly concerned.
Could this sort of thing really happen to mighty Cisco? After all, it
posted 49 percent growth in sales just last quarter. With revenue of
$3.88 billion and an impressive bottom line of $837 million for the
quarter, Cisco is on a $15 billion run rate.
In the marketplace, meanwhile, Cisco is clearly riding the wave of
packet-switched telecom infrastructure driven by the Internet. This
strategy is perfectly aligned with Cisco's products and corporate
culture, while both Lucent and Nortel have to change out huge
circuit-switched product lines and reset their corporate cultures.
How's Cisco's strategy working? So far, great: Its top-line revenue
grew 20 percent faster then Nortel's and twice as fast as Lucent's last
quarter. If Cisco can keep the machine humming, it could outpace Lucent
by July 2001.
There's something wrong with this rosy picture, though. It doesn't
account for all the new upstarts-many with huge valuations-that are now
taking Cisco on.
Cisco's service provider business is focused in three main areas:
IP/ATM switching, broadband access and optical networking. Each of
these is flush with startups. In the IP/ATM area, there are Juniper,
Avici, Pluris and IronBridge. In the broadband access area, there are a
ton of startups. Some are not yet public, such as Promatory, AccessLAN,
SpringTide and CopperCom; others are, like Copper Mountain, RedBack and
Paradyne. In the optical space, Sycamore recently took Wall Street by
storm, and a host of other companies is looking to cash in as well.
Time was (and sometimes still is) that Cisco would just buy companies
like these and integrate them. But those days may be numbered. These
startups have seen the huge pay-off of going public. When they aren't
holding out for the IPO, they're at least making themselves more
expensive for the likes of Cisco.
What's more, some believe acquisitions will slow down with the
expiration, on Dec. 31, 2000, of an accounting rule that lets companies
pool their assets and liabilities during an acquisition. Without the
"pooling of interest option," companies will be motivated to pay cash,
rather than stock, to acquire.
What Cisco can't buy, it will have to fight. Juniper Networks has a
$16.4 billion market cap and a run rate of nearly $120 million. Its M40
router competes with Cisco's GSR 12000 and is working a chiseling
effect on Cisco's switch/router strategy. A little chisel here, a
little there, and before you know it a big chunk of the company is
gone.
That chisel could turn into a sledgehammer. Speculation persists
about a merger of equals, including Juniper, Copper Mountain, RedBack
and Sycamore. Such a company would pose a much larger collective threat
to Cisco, Lucent and Nortel due to its momentum, combined customer
base, engineering talent and superior product sets. It would, that is,
if negotiations among the startups can work beyond the inevitable clash
of egos.
Whether it's sledgehammering or chiseling, though, the impact on
Cisco could be big-bigger than anyone expects. It's just a little too
early to see it in Cisco's numbers.
Nick Lippis is an independent industry adviser. He can be reached at
nick@lippis.com.
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By: Nick Lippis
Copyright 1999 CMP Media Inc.
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