disappointment has left Wall Street pondering a company at a crossroads.
Though the Internet gear maker's growth has
crested, it appears determined to stay the course, however slow the going may be. The company Tuesday evening slashed near-term growth expectations, while insisting that it remains optimistic about its overall prospects. Cisco fell $4.69, or 13%, to a 52-week low of $31.06 Wednesday, on eye-popping volume of 281 million shares.
But at its core, Cisco is a growth company that is still priced richly for that performance. So some people on Wall Street don't rule out a go-for-broke merger that could provide the networker with a jolt of revenue growth, an expanding roster of telcos customers and a shot at leadership in the lucrative and fast-growing optical sector.
The usual suspects:
-- but mostly Ciena. Cisco was unavailable for comment, and Ciena declined to comment on any such deal.
The Stock Answer
Like any Hail Mary, the notion seems far-fetched. For one thing, some investors believe Cisco either can't or won't swing a big deal with its historically highflying stock in near free fall. Note, too, that Ciena's shares have held up better than Cisco's, dropping just fractionally to $81.88 amid a sharp selloff in networking stocks, making a potential deal even more expensive for Cisco, for whom acquisitions have traditionally come on the cheap, given the 40,000% gain in its shares over a decade. These caveats underscore just how quickly the tables have turned on Cisco, which once acquired networking technology companies big and small, public and private, seemingly at its whim.
So the momentum has shifted, and perhaps Ciena's off the Cisco charts for now. But clearly, Cisco needs to do something.
"Maybe this would have made sense a year ago, but now Cisco is seeing a slower order momentum and Ciena is seeing an accelerating order picture," says David Bellet, chairman of
Crown Advisors International
, a New York-based investment firm.
Cisco "would have to pay a major premium, given the attractiveness of Ciena's growth opportunities for the next few years," Bellet continues. A price in the range of $150 a share, nearly double Ciena's closing price Wednesday of $81.88, would be necessary to seal any deal, estimates Bellet, who holds a large position in Ciena. That would put the price for a Ciena-Cisco linkup north of $40 billion.
Of course, given Wednesday's action, staying the course could prove even rougher, as Cisco tries to work through a $2.5 billion pile of inventory, among other hurdles. The risk is that in working down its inventories, some observers say, the company may be forced to push out more routers at lower prices while conserving cash through cost cuts. Expectations will continue to fall.
The Capitalist Retool
The main problem, beyond the slackening economy and that financially distressed customer base, is that Cisco is built around an accelerating stock price.
Probably no Cisco analyst has made this point more clearly than
CIBC World Markets'
Steve Kamman, who says the company needs to retool to better weather this downturn.
"There is nothing fundamentally wrong with the company, but the operating model needs to be revised," says Kamman, who has a hold rating on Cisco. "They'll have to spend more on internal research and development and spend less on buying innovation and revenue growth in optical." CIBC has done no banking for Cisco.
The pressures mount as Cisco gets priced out of growth-enhancing deals and as equipment-spending indicators point down.
There are certain obvious challenges in a degrading economy, says
analyst Tom Lauria, who has a buy rating on Cisco. ING Barings has no banking ties to Cisco.
"It gets really hard to sell stuff," says Lauria, "when the companies you are trying to sell to like
are laying off people."
For Cisco investors right now, there are many questions and not as many answers.