All good things come to an end, and being top dog in the IT and communications industries is no exception.
From IBM in the 1970s and AT&T in the 1980s to Microsoft today, companies who make it to the top soon find themselves the target of regulators. Cisco's strategy of wooing the markets leaves it vulnerable not just to regulation but also to the vagaries of investors.
The networking monolith recently had the largest market capitalisation of any IT company, temporarily overtaking the harangued Microsoft. But the trouble with being at the top of the tree is that everyone wants to knock you down to earth.
Cause for concern
Cisco's strategy of using a high stock price to pay for new acquisitions is starting to cause concern among investors. These concerns, and a general lull in technology stocks, have caused Cisco's share price to slip from more than $80 to less than $60 a share over the last two months.
A series of articles published this month by respected US financial magazine Barron's highlighted those concerns. The claim is that if the company can't keep up its growth in one of three areas - revenues, acquisitions or share price - then the others will falter, and with them the company.
"Cisco is a modern house of cards, in which the cards are Cisco stock and the companies acquired for Cisco stock," asserted Barron's.
Would a serious stock slump have any effect on end users, or be directed purely at shareholders and the stock market?
Pim Bilderbeek, vice president of ebusiness and networking research for Europe at analyst IDC, says: "It doesn't affect users. If its stock tumbles, the company will still exist."
"It may hurt in the short term, but you can bet your bottom dollar that if Cisco stock goes down, Lucent and Nortel will go down too." True enough: both competitor companies' prices have been heading south recently, although less steeply.
There are other concerns that may add fuel to the fire kindled by Barron's, however. Innovation moves at a breakneck pace, and some people doubt whether Cisco is capable of developing products in-house any more. Some say that Cisco is dangerously reliant on startups for its research and development.
Richard Foskett, managing director of networking research firm Rhetorik, says: "The incredible thing is that everyone keeps waiting for Cisco to make a bad acquisition decision, but every time its acquisitions are praised. If Cisco moves into an area, it's considered a hot area."
Cisco must be very good at burying the evidence, because some of these acquisitions have turned out to be less than perfect, says Foskett. "You have to wonder how Cisco can make that many acquisitions," he says. "You have to assume some of them have not been successful."
Market forces are not the only pressure on the integrity of the company. A number of networking companies, including 3Com, Lucent and Newbridge Networks, have recently decided that big is bad, and spun off various parts of their operations to form more flexible, niche subsidiaries.
"All its competitors are breaking themselves down into smaller companies," says Foskett. "Undoubtedly the [revenue growth] bubble will burst, as Cisco cannot continue at its current rate, and may well end up breaking itself up to create money and share value."
Cisco also faces pressure from beyond its traditional rivals. Peter Crowcombe, of analyst firm Infonetics, says: "It is interesting to see the competition stacking up against Cisco. It may not be the companies Cisco expects." He points to Marconi and Alcatel as companies which have managed to re-invent themselves recently, and which may well come knocking at Cisco's door.
A clash with US and European regulators could also be on the cards. Cisco is already under fire for using its share price to bludgeon competitors out of the bidding war for promising startups. This behaviour could be grounds for antitrust investigation, according to Crowcombe, a distraction the company could well do without.
Share price fallout
Cisco's revenues cannot continue to grow at their present rate, Crowcombe agrees. He highlights another implication. "Cisco can't keep on offering its staff equity," he says. "What happens when the price drops or stagnates?" Like a lot of tech companies, Cisco uses its rising share price to attract and retain talent. With a falling share price, this ace could be trumped by smaller, faster-growing companies.
If the share price does take a tumble, the predictions in the Barron's article could come true. Foskett is optimistic that any dent in Cisco's fortunes shouldn't impinge on the day-to-day activities of most of its users, however.
"It's interesting to compare what IT managers say and what the industry says," he comments. "Cisco has always had a good [sales] channel, and the traditional user is not going to make decisions based on short-term share fluctuations. There's still a general perception of the company as strong and getting stronger."
And perceptions, as we know, are important. For the moment, at least, Cisco still looks a good bet.
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