When Will Activists Come Calling for Cisco?
Activist investors -- you know, the guys with pitchforks and torches -- have attacked enough tech companies recently that both sides have found it more efficient to settle into an uneasy co-existence: Corporate watchdogs and businesses in transition, or, depending on whom you ask, carpetbaggers and prey.
Activists are pretty open about the levers they’ll pull to make a stock move higher. They’ll fight for goals that include some combination of new management, stock buybacks, dividends and divestitures. Companies saddled with entrenched leadership and a slew of poorly-paired businesses under a single corporate umbrella -- but sitting atop piles of cash -- have spent the last few quarters pow-wowing with lawyers, crisis PR firms and consultants to prepare for activist broadsides.
So I was surprised when Cisco's chief executive, John Chambers, told a room full of Bloomberg editors and writers in New York that he and his company have had “no conversations with activist shareholders.” He added in his fast-paced, southern drawl, “No one in their right minds would go after Cisco.”
He must have meant that no conversations with activists have happened lately, since it’s well-documented that Ralph Nader, a longtime shareholder, agitated for a special dividend in 2011 when the stock was moribund. Chambers himself hinted at the idea that the company had made missteps that left it vulnerable to an investor uprising, in an internal email that he wrote that same year.
Cisco still seems to have some of the ingredients that whip up investor agitation these days. Chambers has held Cisco's top spot for about 20 years, the last decade of which has seen Cisco’s shares lag the Nasdaq, the S&P 500, Microsoft and even IBM. It has about $53 billion in cash on its books, or about $10 a share for a $30-a-share stock. Even though Chambers says he’s stepping down at the end of next year, he refuses to discuss succession plans.
Bloomberg data shows that Cisco’s margins overall are falling, while those of its competitors are rising. In the Bloomberg meeting yesterday, Chambers was shown a chart illustrating his company’s deteriorating margins. He leaped from his chair, studied the projection on the screen, then reasoned that real investors place more importance on Cisco’s higher margin, bigger divisions -- like the networking equipment it sells -- instead of underperforming units like its video equipment arm.
Yet less than 30 minutes after Chambers told Bloomberg editors and writers yesterday that lower margin products were weighing on Cisco's overall performance, he asserted that no one could imagine breaking up the company. He spoke with authority, the consummate salesman. It was easy to forget that investors have pushed the company to sell the video equipment division.
In my conversations with investors and analysts, some of them noted that Cisco is in an unusual position and represents a somewhat different case than other lagging giants such as Microsoft, Hewlett-Packard and eBay.
The existential threat to Cisco’s primary business -- switches and router hardware that anchor big data centers -- is not on the company's doorstep yet. Cloud computing and the rise of mobility are already eating away at the businesses of Microsoft and HP in dramatic fashion. And eBay has already fallen behind its competitors in online retail.
But Cisco’s main business, networking, is incredibly complex. The Googles and the Facebooks of the world have the firepower and money to come up with their own systems because tech is their primary business. But most big companies like manufacturers or airlines want plug-and-play solutions. Cisco, for now, offers the best one and so its products command premium prices.
The companies that are making cheaper hardware than Cisco, including Facebook, have a long way to go before their products are widely adopted. Cisco has also outmaneuvered immediate competitors like Juniper, which is fighting off an activist of its own.
Most important, Chambers has delivered results in the past couple of quarters thanks to a combination of rising topline sales growth, some slash-and-burn layoffs and restructurings that have reduced headcount and gotten rid of what Chambers referred to as old thinking.
“You have to disrupt yourself,” he told Bloomberg reporters and writers yesterday.
To hear Chambers tell it, Cisco has been right about every major computing trend. But his acquisition strategy tells a different story. Remember Cerent, Flip and Scientific Atlanta? I don't blame you if you don't. A rising stock price can make memories hazy, and over the past year Cisco’s shares finally started to outperform the indexes.
The activists may well leave Cisco alone for now, and Chambers is making his rounds of the press and the Street to talk up his company’s prospects for the next five years.
Cisco will be the most important tech company in the world, Chambers says, because of its ability to see around corners and anticipate trends. I don’t quite buy that, but I do think that Chambers recognizes something very important: His company has a big old moat around it. So he’s working overtime to take advantage of that buffer before activists or competitors figure out how to storm Cisco's castle.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Timothy L. O'Brien at email@example.com