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acquisition drought is over, but the grass is still far from green.


$150 million buy of closely held chip company


ended a seven-month nonacquisition streak at Cisco. But with uncertainty clouding its outlook at home and abroad, the once-acquisitive networking giant remains on a decidedly short leash. If it fails to make more deals, analysts say, Cisco risks seeing its product pipeline run dry, choking off growth opportunities and stock appreciation.

Cisco shares, which are trading at less than a quarter of their 52-week high, added 50 cents Wednesday to close at $16.70.

Riding the Metro

The deal for San Jose, Calif.-based AuroraNetics will help Cisco improve its successful


metro, or edge-of-network, fiber-optic networking box. The acquisition is relatively cheap by the rarefied standards of the networking business: Cisco is paying $2.9 million per AuroraNetics employee, a dramatic drop from the $24 million per head it paid for Cerent in 1999 and below the

$3.5 million going rate it established over the past two years.

But the reality is that start-up talent may simply be too expensive right now. Cisco's once-vaunted

perpetual growth machine, which devoured dozens of companies each year, lost its primary fuel source as network equipment spending collapsed over the past year: an ever-appreciating stock. Now, as the collapse of IT spending spreads overseas, some observers wonder whether Cisco will be able to spend its way to dominance again. Cisco representatives didn't immediately return calls seeking comment.

Off a Cliff
Deal-happy Cisco ends a long dry spell

Source: Thomson Financial Securities Data

"I think Cisco's looked at companies and walked away, unwilling to pay what these companies think they are worth," says

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Sanford Bernstein

analyst Paul Sagawa, who rates Cisco market perform, his second-highest rating. His firm does no underwriting. "It takes it a while to sink in with entrepreneurs -- they just aren't going to get $20 million per employee for their companies.

"Dilutionwise, this deal cost them a penny per share on earnings, and that's probably the limit Cisco was willing to go," adds Sagawa.

Hungry Like Joe Wolf

Cisco has made just one deal this year, after running through more than two dozen in 2000. The company has historically depended on acquisitions to sharpen its technological edge and stay ahead of competitors. Now, just as it plunges into the potentially lucrative telecommunications service provider market, it may lack attractive products to win over big-spending customers.

"For three years nearly every deal they made went to feed the service provider monster," says a New York-based buy-side analyst whose firm owns Cisco. "That all stopped. Now, I think it brings into question their whole proposition that they can grow 30% to 50% again."

To be sure, Cisco once gladly paid top dollar for companies that promised to pay back in revenue down the road. But sales just ain't what they used to be. And, says Sagawa -- who has been one of Wall Street's most accurate predictors of a spending slowdown -- things will get worse.

"Based on the work we've done, demand for products on the enterprise and carrier side offers a very bleak picture, at least through the beginning part of 2002," says Sagawa. "I just don't think China is going to be enough to pull Cisco through, and Europe is imploding right now."

Europe is very much on Wall Street's mind lately. Especially after No. 2 PC maker




blamed the dismal European market for a second-quarter sales shortfall.

"Europe carried the day in the last quarter, but the Compaq announcement raised the issue of how weak Europe is," says the buy-sider, who asked not to be identified. "I think things are getting worse over there."

The Smart Set

Cisco is due to report fourth-quarter earnings Aug. 7. Firings, product kills, a

massive inventory writedown and corporate restructuring have helped reset the company's cost structure, so there is some hope on the Street that Cisco can hit estimates. Analysts expect earnings to come in at 41 cents a share, before charges.

"I expect them to make the number -- they have a lot of accounting weapons at their disposal to deliver the goods," says Sagawa, who points to $620 million in deferred revenue last quarter that Cisco could dip into. But, says Sagawa, don't expect financial guidance for fiscal 2002, in a "tacit admission that things are pretty bad" throughout the industry.

But even if Cisco does hit its numbers, the grass still isn't looking so green nowadays in San Jose.