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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (40030)	3/5/2001 10:25:42 PM
From: EnricoPalazzo	Read Replies (1) \| Respond to of 54805

I don't really follow CSCO very closely, although like most of us I can't exactly ignore them either. It seems to me that the real issue with CSCO isn't excessive loans to their customers, or using stock to buy companies in lieu of internal R & D. Those both seem like short-term problems, stemming from a downdraft in the communications business & in CSCO's stock price. Actually, the latter issue (lack of an R & D department) is a bit troubling, but I can understand, at a high level, that CSCO maintains a high ROIC because companies they buy are worth more in CSCO than outside of it--because plugging into IOS adds value. Basically, buying all of your products is a shrewd strategy, if you can get them all for fifty cents on the dollar. In a very twisted way, it's actually quite Buffettesque. The real issue with CSCO, as this article points out, is that the above paragraph starts to break down in the new telecom world. All of a sudden, the ability to plug into IOS isn't very important, as the telecom firms need a more reliable, scalable operating system than IOS--and they also don't want to depend on CSCO. In fact, the requirements of today's telecom operators are such that sheer speed of hardware is more importance than quality of software, and CSCO's business is built on software, in many ways. I know it's not a novel observation, but still, it's interesting to realize that all three of our major gorillas (CSCO, INTC, MSFT) are seeing the importance of their gorilladom drastically diminished, as the new discontinuous innovation (the internet) dwarfs their old ones (intranets and PCs) in importance. I think it will be very interesting to watch how these three firms come to grips with this reality, and try to expand into the new market. Grove is no longer active in INTC, I think, although I'm sure those he left behind are quite good. MSFT & CSCO still have the old guard in charge, although both have lost some key players to retirement and start-ups, respectively. I suspect, quite frankly, that the managements of these companies is substantially more aware and fleet-footed than those of IBM, digital, etc. (can you imagine anyone from IBM writing "only the paranoid survive"?) I'd give them a fighting chance. That thing about retirement reminds me, actually, of an interview I had last year. The consultant who was interviewing me asked me what I thought about Microsoft's ability to produce leaders. In particular, some would point to McKinsey or GE as great leadership factories, because they "graduate" CEOs. I have to say, the fact that GE graduates so many CEOs strikes me as a real problem for them. I mean, Microsoft makes sure that their people either want to keep working for Microsoft, or they retire--they do not push them out to work for rivals. GE seems to have a retention problem, not a leadership surplus. And I think you could say the same about CSCO (just ask JNPR...). OK, now that my obligatory MSFT plug is out of the way, one more comment about CSCO. Perhaps the slowdown in their acquisitions binge is due less to their slowing stock (as the article points out, startups' stocks have often lost more value, comparatively), than to a real loss in direction. The article mentioned that CSCO is sort of disillusioned with the optics market. Maybe CSCO is just stepping back to figure out what the heck their long-term strategy is. It's a scary thought.