Skip to main content

If

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

is looking more and more like the glue of the networked world, its communications equipment-building rivals are in a stickier fix than ever.

With sales of personal technology growing furiously and networking gear getting cheaper and more ubiquitous, analysts expect 2003 to bring a virtual population explosion among network gadgets. Soon enough there will be literally billions of digital camcorders, personal digital assistants and other devices that will call out for a simple interconnection standard.

With $20 billion in its war chest and a vow to enter a dozen new markets, investors say, Cisco is in an unrivaled position to bend these new, simpler networks to its own specifications. Doing so could help to answer some of the swirling questions about the one-time highflier's growth prospects. It could also turn the ever-present spotlight on Cisco's acquisition prospects away from the sagging communications gear sector to something completely different and perhaps more forward-thinking -- network software.

"Cisco could be the glue," says Francis McInerney of North River Ventures, a New York telecom strategy shop. "They are in the best position to do it. They have the money, the experience and the IP

Internet protocol technology that can help turn everything into seamless services."

Minding the Gap

While a pickup in the connectivity business could deliver a sales boost at the growth-deprived networker, it almost surely means more bad news for its red-ink stained rivals. Investors in these beaten-down names, from

Lucent

(LU)

to

Ciena

(CIEN) - Get Ciena Corporation Report

, continue to cross their fingers -- against all apparent odds -- that Cisco will decide to buy them out of their misery.

Ahead of the Pack
Cisco's market cap drawfs that of North American rivals

*Lucent, Nortel, Ciena, Tellabs, Juniper, 3Com, Foundry, Extreme, Redback, Riverstone

TheStreet Recommends

Over the past several months, Cisco has been rumored to be interested in everything from storage-software maker

Veritas

(VRTS) - Get Virtus Investment Partners, Inc. Report

to optical networking shop Ciena. But there is a stark contrast between market talk and Cisco action. In 2002, Cisco made four relatively minor acquisitions, a far cry from the 23 deals it made in 2000. With a weak stock and a turbulent war-wary market, analysts expect Cisco will continue to play conservatively.

Meanwhile, a shrinking trend in the sales-starved information technology and telecom gear markets all but throws the various players into theoretical alliances based on product types and customer appeal. But CEO John Chambers has firmly said Cisco will not buy a competitor. And despite how much investors and industry types would want Cisco to jump-start the action in a fading sector, the industry gorilla will likely remain on the sidelines.

The company has navigated fairly well in the downturn, in part by preserving its cash and limiting itself to repeating the gospel of productivity enhancement. Cisco has continued to emphasize the commercial efficiencies of an increasingly networked planet, while sprinkling in a few small moves here and there.

Now, however, the industry's scales are almost entirely in Cisco's favor. The computer networker's cash position alone is larger than the combined market capitalization of its four largest North American rivals.

On one side of the field you have a shrewd and frugal acquirer with plenty of cash and loads of hesitation. On the other side are countless beaten-down tech companies with talent and products aimed idly at any number of possible growth opportunities.

This has been true for more than a year. The only thing that has changed is that Cisco has raised its target from nine new growth markets to 12, with 15 being the eventual goal next year.

Five Stocks Shine in Dreary Year

Networking: Next Year: Cisco, Juniper and Red Ink

Cisco Shift Gums Up the Works for Rivals

Homeland Security: Firms Scramble to Cash In

Wireless: Pinning Hopes on Shutterbugs

Consumer Debt: Looks Set to Keep Soaring

War Optimists May Face Pricey Surprise

Oil: The Price Outlook Is Clear as Mud

Credit Crunch Could Chew Up Lenders

Why the apparent scramble?

Alarmingly, Cisco's roaring growth engine has

stalled for the past year and its core routing and switching business -- a $14 billion-per-year slice of the information technology spending pie -- is in danger of being

carved up by lower-priced gear from rivals like

Dell

(DELL) - Get Dell Technologies Inc Class C Report

and China's

Huawei

.

Man With the Mustache

With that in mind, Cisco's growth hunt has stimulated even more than the usual chatter. And some software analysts say Cisco's untapped growth market might be right under its nose.

"Cisco is the king of data hardware, but these things are far too complicated right now," says Amy Wohl, a software analyst with Wohl Associates in Narberth, Pa. "We need a combination of hardware and software to create automation and simplicity. It requires imposing levels of software across the top of the network to make these systems more manageable."

It's not an unreasonable leap of logic to suggest Cisco could jump on the popular software bandwagon and add network management or security programs to its extensive hardware operating system.

Sun

(SUNW) - Get Sunworks, Inc. Report

and

IBM

(IBM) - Get International Business Machines Corporation Report

have been acquiring software outfits largely to spread their businesses beyond hardware.

Cisco has recently added "we are a hardware

and

a software company" to its message to investors. And given the luxurious margins enjoyed by software companies, the advantages of diversification aren't lost on Cisco executives.

"There is a giant rummage sale going on," says Wohl. "If you are a company with a bunch of money, there's never been a better time to put something you've wanted in your portfolio."

"They can offer some sort of network management scheme of their own," adds Wohl, "or instead, have their stuff managed by someone else's." Put that way, it seems clear where Cisco's headed.

Check out my new and improved The Tech Edge newsletter. The new Tech Edge provides you with exclusive access to my investigative reports each week as well as real-time portfolio picks from Jordan Kahn, CFA, a new contributor to my newsletter.

Click here

for a 14-day free trial.