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Cisco Spread Thin

 March 15, 2011 05:01 PM

Cisco is often held up in Business School classrooms as an example of a company that has been able to successfully lever alliances and acquisitions for growth. Although I do often discuss Cisco in the classroom, that distinction has never quite sat well with me. At some point, incessant dealmaking spreads a firm's resources thin (for background, see Is Cisco Becoming Too Big?).

The Economist picked up on this theme in a recent article (see Is Cisco Spreading Itself Thin?). According to The Economist:

[Related -Citrix Systems, Inc. (NASDAQ:CTXS): A Look At Opportunities And Threats]

(Cisco) is trying to make a business out of reinventing itself—so much so that investors wonder if the firm is stretching itself too thinly. Those criticisms are unlikely to go away after the quarterly results Cisco posted on February 9th. Earnings fell by 18% and revenues rose by an unexciting 6% year-on-year. To avoid getting stuck in a market for obsolete products, Cisco is not entering just a couple of big new markets, but more than 30, including "virtual health care", "cloud computing" and "safety and security".

Entering greater than 30 new markets?? Wow!

As I mentioned in my previous post (see Is Cisco Becoming Too Big?):

[Related -Cisco Systems, Inc. (NASDAQ:CSCO): What Cisco May Add To Next-Gen UCS?]

…one of the basic tenets of transaction cost economics…is that although acquisitions might make sense when there is market failure (and/or substantial operating synergies), at some point the benefits of bringing transactions within a firm (e.g., through acquisition) wear off. Size eventually yields inefficiency.

I fear that this is precisely what is happening to Cisco.

However, as The Economist notes, John Chambers (Cisco's CEO) seems to be aware of the issue.

…he (Chambers) seems to have tapped on the brake. He no longer talks about increasing the number of new markets the firm enters to 50 and beyond. And no additional ones have been announced for some time.

Let's hope that this represents a first step toward reevaluating their corporate strategy, …and righting the ship.



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