Carefully Assessing Cisco’s Growth Strategy

October 2009

John T. Chambers, chief executive of the networking giant Cisco Systems, is keeping the acquisition machine humming. The company’s $2.9 billion deal for Starent Networks is the second of roughly that size in October alone. And he has promised that more deals are coming. It’s too bad this strategy hasn’t quite paid off for shareholders recently, Breakingviews says.  Pulling away some of the spotlight away from the Sun Microsystems / Oracle merger.

Cisco’s rationale has been consistent, the publication concedes. It argues that by combining, it can sell more stuff than Starent could alone, and there may be something to that. Starent produces software and equipment to manage data traffic for wireless devices; Cisco sells lots of related products to telecommunications operators. So the sum of the two companies may end up being more than the parts, Breakingviews says.

Yet this deal is bigger than Cisco’s typical $1 billion or smaller target, the publication notes. Small companies usually have weak relationships with potential customers and a small sales staff, so plugging these groups into Cisco’s marketing machine maximizes revenue. Starent’s maturity means that kind of so-called revenue synergy will be harder to come by, Breakingviews suggests.

Moreover, the deals this month for Starent and Tandberg are the fifth- and sixth-biggest acquisitions Cisco has ever made, according to Dealogic. This smacks of Cisco, a $139 billion company, having to perform larger acquisitions — with arguably more execution risk — to move the needle, Breakingviews argues.

Cisco does not agree. The company says it is merely being opportunistic and taking advantage of depressed valuations. Perhaps so. But, Breakingviews points out, it is paying a hefty 39 times Starent’s estimated 2010 earnings.

The record suggests that Starent’s shareholders have gotten the better end of the stick, Breakingviews says. They are being offered a 21 percent premium to give up control. The value of stock held by Cisco’s shareholders, on the other hand, has declined by roughly a third over the last decade, despite — or perhaps partly because of — its prolific deal-making. It might be time for Cisco to slow the M&A machine and prove that it works, Breakingviews suggests.