Posted by: Peter Burrows on February 10, 2009
Once it completes its surprise $4 billion debt offering, networking giant Cisco Systems will have more than $30 billion in the bank. That’s more than Apple at $27 billion and Microsoft at $20 billion, and within sight of Exxon Mobil with $38 billion.
That’s got the rumor mill buzzing about a possible mega-acquisition—always a fun excuse for random speculation. But before I dive in, I thought I’d pass on a more mundane possibility, which came to me courtesy of JMP Securities analyst Sam Wilson. He points out that only $3.2 billion of Cisco’s cash is currently in the U.S., and that the company will need to spend $500 million of that on February 20 to pay off debt related to its 2005 purchase of Scientific Atlanta. That would leave the company with just $2.7 billion stateside—not much for a company that bought back $10 billion of its own chronically range-bound stock in fiscal 2008. Indeed, the company purchased just $600 million of its shares in the quarter that ended on Jan. 31, compared to an average repurchase of $2.7 billion worth of stock in the previous eight quarters.
Sam thinks it’s no coincidence that the debt offering came just days after the Senate killed a proposal to let companies repatriate offshore earnings at lower tax rates. Cisco chairman John Chambers pointed out during a Feb. 4 quarterly earnings call that Ciso was disappointed with the decision, but that the company would move forward. “Cisco made very clear that it wouldn’t repatriate a penny,” says Wilson. Raising the debt was a fairly pain-free alternative, since Wall Street was glad to support the offering. How many companies these days have $27 billion lying around, in case times get truly tight?
Of course, discussing working capital and stock buybacks isn’t nearly as interesting as speculating about possible acquisitions. That’s especially true with Cisco, given it’s fast expanding sense of self. Just in the past month, the company has announced everything from “media hubs” for distributing music and movies around your home, to back-office servers that put the company in competition with Sun, H-P and IBM. And the company has many other balls in the air at the moment, too. For clues as to what he may want to acquire next, here is what Chambers said during the earnings call regarding his top priorities for the company:
We are prioritizing our top five opportunities for the entire company and making sure that they are properly resourced. These top five priority opportunities are next generation company and next generation customer relationships or what we call internally Cisco 3.0. Second, collaboration/Web 2.0. Third, video and visual networking. Fourth, data center and virtualization. Fifth, globalization.
With this in mind, here are my thoughts on some possible acquisition targets, categorized according to my proprietary “Conceivability” index. They are after the jump:
EMC -- With a market cap of $24 billion, Cisco would pretty much have to break the bank to buy the storage king. But buying EMC would enable Cisco to take a giant step in achieving priority No. 4: "data center and virtualization." After all, the folks who buy the storage for data centers probably control more budget dollars than the network czars Cisco deals with. And storage may well turn out to be a more recession-proof business; companies can skimp on new software, servers and network gear, but they've got to have someplace to store all the digital records and other bytes that are created every day. Plus, EMC owns 83% of VMWare (see below).
NetApp -- With a market cap of $4.9 billion, buying NetApp would be a much cheaper way to become a storage industry leader, compared with buying EMC. I know Cisco's board has considered both of these options seriously in the past. In fact, NetApp modeled itself on Cisco (Cisco essentially created networking appliances, so companies wouldn't need to buy pricier, proprietary networking technology from vertically-integrated companies like Sun and IBM. NetApp would do the same for storage). This was due in large part to the influence of early investor and current boardmember Don Valentine, the legendary Sequoia Capital venture capitalist who also funded Cisco and a was a boardmember there from 1987 to 2005.
VMWare -- The pioneer of virtualization is no longer a stock market darling, and now seems caught directly in Microsoft's crosshairs. But it's still a technology leader, and with a market cap of $9.5 billion may be the most cost-effective way for Cisco to buy a truly gold-plated data center customer list. And Cisco has been courting VMWare for years. It invested $150 million in the company in 2007, and last year struck up a partnership as it stepped up its data center assault.
Akamai -- Cisco sees video (priority No. 3) as the rocket-fuel that's going to keep Web demand rising for years or decades to come. Just today, it issued an update on its eye-popping estimates of the impact on traffic. Buying Akamai (market cap: $2.9 billion) would give it the leading content distribution network provider-the company that doles out everything from iTunes songs for Apple to March Madness game broadcasts for CBS. Cisco clearly has designs on this CDN market. Buying Akamai would let it more easily manage a shift from Akamai's more decentralized approach (great for static broadcast content) to a more centralized approach that would facilitate the use of real-time interactive video (like Cisco's own Telepresence videoconferencing systems).
Salesforce -- I suppose Salesforce (market cap: $3.5 billion) might help Cisco with that Priority No. 1--helping companies work more closely internally and with business partners. And Cisco's Webex acquisition shows the company is moving "up the stack" from plumbing to applications that real people use. But selling CRM would open yet another totally new front for a company that's already moving in many directions.
Sun Microsystems -- It's still got great technology (including some promising offerings in the afore-mentioned storage space), and a corporate philosophy--"the network is the computer"--that's right in line with Chambers world view. But Chambers hates nothing more than layoffs, and that would likely be in the cards if he purchased the once-proud server maker (market cap: $4.3 billion).
Research In Motion -- For all of its networking might and product breadth, Cisco has never been a huge player in the now-booming mobile communications market. Since Cisco can't afford Apple, RIMM is the next best thing--and the Blackberry maker serves the corporate set that are still Cisco's bread and butter. But Chambers might well need another loan to buy it outright, given RIM's $32 billion market cap.
Palm -- Buying the new darling of the smart phone set would certainly be the cheaper way to go, given its $860 million market cap. And putting Cisco's sales and marketing might behind the owner of the first brand new mobile computing platform to come along in years might be a powerful combination. And why not throw Cisco onto the list of possible suitors. Some of my sources (only one of which is Palm backer Roger McNamee) think that at some point, old-guard handset players such as Motorola, Samsung or maybe even Nokia will realize that they don't have what it takes to build a true computing platform, and will come a callin.
Motorola -- Cisco would never want Motorola's beleagured handset business, and would never be able to keep the healthier set-top box business on anti-trust grounds (given that Scientific Atlanta purchase). That leaves only MOT's cellular infrastructure business--an area that Cisco has stayed away from. (Market cap: $9.4 billion).
So I'm sure I'm leaving out plenty of other possible candidates. Let me know your ideas.