Cisco (CSCO) - Get Report is basically saying it's a buyer with its deal to acquireWebEx( WEBX). With that in mind, I compiled a list of cheap tech companies that overlap in interesting ways with Cisco's strategic objectives, and I set them up in a portfolio on Stockpickr called Who Will Cisco Buy Next?.
Cisco has always built itself through acquisitions. Its original growth story is a thing of beauty. Imagine it this way: Let's say everyone in the world lived on a one-person island. One day a group of bridge builders came along and built bridges for everyone. They had the monopoly, because they sold bridges to everyone. Everyone! That was Cisco with its original routers that one by one connected computers to the Internet all through the '90s.
The cash flows from that business gave Cisco the means to buy other companies, often start-ups for tens of billions, allowing Cisco to quickly become the leader in various other segments of the communications industry. In particular, it bought several fiber-optic startups that allowed it to compete in the broadband bandwidth space. Cisco also bought WiFi startups that got it into last-mile broadband connectivity.
More recently, with the
acquisition of WebEx in particular
, it looks as if Cisco is taking a different tack: buying established leaders in industries that can extend its services through the corporate enterprise.
Cisco doesn't want to be just the nuts and bolts connecting the computers; it wants to store the data on those networks (through its just-announced
acquisition of NeoPath
), and it wants to dominate the communication that occurs between the humans behind those computers, hence such a mature acquisition as WebEx.
is a name that could make sense for Cisco.
When the Internet was just blossoming, it was simply enough to get your info from your computer out into the world beyond. And that is what Cisco was great at. But now with the audience fully matured and demanding video (e.g., WebEx), the companies that speed up the last mile of transmission of Web content will become increasingly valuable. Akamai is the leader in this.
Akamai takes content (for instance, your Web site) off of your local hosting service and distributes it across the world so that whoever wants your content will have to take as few hops as possible to find it. At 15 times cash flows, Akamai trades in line with where WebEx is trading at Cisco's acquisition price.
, a protege of
, owns shares of Akamai. Druckenmiller was with Soros during the whole "break the bank of England" trade, which scored more than $1 billion for Soros in the early '90s.
Similarly, Druckenmiller, a believer in tech, was with Soros (and then left) when Soros made a fateful bet on tech at the peak of the boom.
on Stockpickr contains his most recent top positions.
J2 Global Communications
is another interesting play for Cisco here. J2 Global provides Internet faxing (it used to be called JFax), conference calling and other customer relationship management services. A combination of WebEx and J2 Global could provide a truly unified communications platform for the enterprise.
Similar to Akamai and WebEx, J2 Global trades at 15 times cash flows. It has $156 million of cash in the bank with essentially no debt, so the balance sheet is pristine. Last year it had EBITDA of $78 million and 21% revenue growth. This year, analysts are estimating revenue will grow from $181 million to $222 million. That's substantial growth for a company that is trading at only a slightly above-average price-to-earnings ratio compared with the market at large.
J2 Global is also owned by the
, a fund recently profiled in
. In an interview with the publication, fund manager Ken Mertz provided the following insight:
Barron's Online: What is your outlook on U.S. stocks? Mertz: We could be looking at a price-to-earnings multiple expansionin the marketplace, which would favor growth stocks. Q: The Russell 2000 gained 17% in 2006. What do you expect this year? A: I would look for something over 10%, but we would be looking forthe Russell 2000 Growth to be doing a little bit better than Russell 2000 Value this year. Over the next five years, our expectations are for our portfolio to grow 20%-plus.
For the rest of the companies Cisco could potentially buy next, including storage provider
Brocade Communications Systems
, check out the
portfolio on Stockpickr.
Stockpickr tip of the day:
If you haven't yet done so, check out the newest feature on Stockpickr: the ability to track the stocks in your portfolio. The way to do it is to
and then hit the "Start Tracking" button from your home page on Stockpickr.
The feature just launched, so the results are not yet meaningful, but here are
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.