Robert Cyran raised a legitimate question about Cisco’s growth trajectory and corporate strategy in a recent New York Times article (see Cisco’s Run of Spending). According to Mr. Cyran:
Cisco, the computer networking giant, has spent the last decade acquiring rivals and buying back stock. It’s time to acknowledge that this strategy isn’t working. Investors who bought Cisco’s shares a decade ago have received no return on their investment.
MY COMMENT: That might be true, but in all fairness, if you’d bought the Nasdaq index a decade ago, you haven’t received much return either. In nominal price terms, Cisco’s return is more or less equivalent to that of Cisco. But we’ll come back to that later.
Results this week should give Cisco another chance to profess its optimism…Eternal ebullience is nothing new from Mr. Chambers, who once claimed Cisco could increase sales by 50 percent a year over the long run. They’ve since grown 7 percent annually.
Yet the years of deal making may be making Cisco unwieldy. Cisco has 59 standing boards and councils. This seems like a recipe for endless meetings, management confusion and reduced accountability.
MY COMMENT: This latter point is one with which I wholeheartedly agree. In fact, one of the basic tenets of transaction cost economics (see Oliver Williamson, Nobel Honoree) is that although acquisitions might make sense when there is market failure, at some point the benefits of bringing transactions within a firm (e.g., through acquisition) wear off. Size eventually yields inefficiency.
Cisco has always acquired and plugged companies into its sales and production network.
…Cisco continues to acquire new businesses — $22 billion worth since 2002 (including some $7 billion this year), according to Dealogic.
The other pillar of Cisco’s strategy, stock repurchases, hasn’t rewarded shareholders either. Returning excess cash from operations to shareholders should increase a stock price. Unfortunately, in Cisco’s case, the practice hasn’t measured up to theory. Cisco has spent close to $60 billion on stock buybacks since the start of its 2002 fiscal year. That’s about three-quarters of cash flow from operations. So why haven’t shareholders benefited?
First, the total count of shares outstanding has only decreased by 1.3 billion. This is partly because of dilutive acquisitions. However, if the number of shares hasn’t shrunk much and Cisco’s stock hasn’t risen, this presents a conundrum. What exactly is the benefit to shareholders of these purchases? Shouldn’t the price of a slice of Cisco increase if it is spending so much on buybacks?
MY COMMENT: Ouch! Now that is damning evidence. If the number of shares (float) decreases but the price remains the same, shareholder value is destroyed. In this sense then, Cisco’s return actually compares unfavorably in real terms to that of the Nasdaq. Moreover, it is suggestive that Cisco’s acquisitions may have played a role in destroying shareholder value (see Acquisitions, A Great Shareholder Ripoff).
So what is Mr. Cyran’s proposed solution?
After 10 years of searching for the promised land of growth, it’s time for something different. Slowing acquisitions would [be] a good start.
Moreover, if Cisco is so complex that it requires 59 councils, it should consider breaking into more manageable pieces.
MY COMMENT: After years as a Wall Street darling, I wonder whether Cisco truly deserves that distinction. And I agree that it might not be a bad idea for them to reevaluate their corporate strategy.