Business Tech

Network equipment giant Cisco Systems is feeling good enough about the economy to rev up its acquisition engine, pledging to spend more than $6 billion in a single month on smaller companies.

Cisco on Tuesday announced its third acquisition this month and its sixth acquisition so far this year. The company said it plans to buy Web-based security software company ScanSafe for about $183 million in cash.

Two weeks ago the company announced plans to buy wireless equipment maker Starent Networks for $2.9 billion. And at the beginning of the month, it said it would buy Norwegian video conference equipment maker Tandberg for $3 billion

After a brief acquisition hiatus the past year during the economic downturn, Cisco is back in the merger and acquisition saddle. In all of 2008, Cisco bought five companies, all well below the $1 billion price tag. In 2007, it bought a total of 11 companies, including the $2.9 billion purchase of WebEx.

(Credit: Vibol Peou/CNET)

Cisco's eagerness to get out its checkbook again, indicates two things. First it shows that Cisco, which had about $35 billion in cash as of the end of July, is confident enough in the stability and recovery of the economy that it can make some big purchases. And second, it's a good sign that Cisco is seeing some good deals, as the economic downturn has likely depressed the value of many potential acquisition targets.

"Cisco has a lot of cash," said Zeus Kerravala, a senior vice president at Yankee Group. "And it's definitely a buyers' market out there today. If you look at the timing and the amount of money it's spending, I think you can definitely say the company is feeling better about spending that cash now than they were earlier this year or even last year."

Tech bellwether
Cisco, which makes equipment that powers the Internet and most corporate networks around the world, is seen as a bellwether in the tech industry. Because the company's products are used by almost every large company, government entity, broadband and telephone service provider, and thousands of small and medium businesses around the globe, the company has a strong pulse on the economy and technology spending in general.

The company's CEO John Chambers is viewed as somewhat of a technology oracle. And investors listen carefully to what he says and the tone of his comments for hints at what to expect from other companies in the technology sector. Cisco was one of the first companies, well over a year ago, to see the economic downturn coming. The company had noted a slowdown in spending from some of its biggest corporate customers in the U.S. and Canada.

And during the company's most recent quarterly earnings conference call in August, Chambers said he was optimistic that the economy, at least in the U.S., was starting to improve.

"We saw a number of positive signs in the economy and in our business over the fourth quarter," Chambers said during the call in August. "It's still early, but if we continue to see these positive trends in one or two more quarters, there's a good chance we say the tipping point occurred in the fourth quarter."

Specifically, Chambers said he saw orders for new products reverting back to normal trends in the company's fourth fiscal quarter. And he said he was starting to see sequential growth again.

It would appear that the positive trends that Chambers saw in the fourth quarter are continuing in the first quarter, as Cisco now feels confident enough to make some big purchases.

This is important because during the company's 25-year history, Cisco has traditionally grown its business through acquisition. During the dot-com and telecom boom times, Cisco was one of the biggest acquirers in the technology industry. In 1999, it spent roughly $14 billion on 18 companies, including nearly $7 billion on optical networking start-up Cerent. In 2000, it spent about $12.5 billion on 28 deals.

After the bubble burst, the company's M&A activity was relatively light until 2005, when it bought Scientific Atlanta for $6.59 billion. In 2005, Cisco spent a total of about $7.7 billion, the most money it had spent in one year on acquisitions. With two months left in 2009, Cisco is getting close to breaking that record this year.

As the company attempts to get into new markets like video conferencing, data center, wireless, and consumer products, it is acquiring companies that meet its strategic needs. Chambers has repeatedly talked about the importance of investing during a downturn to position the company growth when the economy returns.

Cornering new markets
ScanSafe is a cloud-based software service that allows customers to license applications on demand. The company said ScanSafe's technology will help Cisco expand on capabilities it added when it bought IronPort in 2007. Cisco also plans to integrate ScanSafe's service with its AnyConnect VPN client to provide a secure mobility solution. And Cisco will use ScanSafe's data centers to provide new cloud security services.

The ScanSafe acquisition is small compared to the other two big acquisitions this month, but Kerravala said it's still very important from a strategic standpoint.

"This acquisition is more aligned with what Cisco is doing in the cloud and in the data center," he said. "The biggest barrier to cloud computing and services is security. So this fits in nicely with Cisco's cloud, data center, and borderless enterprise initiatives."

But the hefty price tags that the company is paying for larger more established companies, such as Starent and Tandberg, suggest Cisco is also looking for a kick-start to jump into new markets like video conferencing and the data center. This is especially important as it goes head-to-head with large competitors, such as Hewlett-Packard and IBM. These deals not only help Cisco compete more aggressively, they help it deliver the growth and performance that Wall Street expects from the company.

That said, Cisco probably wouldn't have considered these big acquisitions if it didn't feel like the economy was returning to normal.

"In a down market, I doubt they'd look for these big deals," Kerravala said. "Now with things coming back, it looks like Chambers thinks the timing is right. When you are being asked by Wall Street to grow 10 to 15 percent each quarter and you're as big as Cisco is now, you have to make big deals to sustain that kind of growth."

Another round of employees at Cisco Systems reportedly got pink slips Thursday, as the company laid off several hundred employees as part of its plan to cut costs and realign its business.

The Wall Street Journal reported Friday that between 600 and 700 Cisco employees were laid off at the company's headquarters in San Jose, Calif. The company also cut jobs at branch offices in other parts of the U.S. The Wall Street Journal cited sources close to the company.

A spokesman for the company told the Wall Street Journal that Cisco was "doing everything possible to minimize the impact on employees affected by the limited restructuring."

Like all companies, Cisco, which makes networking equipment that runs the Internet and provides communications for large companies, has seen sales slump as a result of the global recession. The company said earlier this year that it would likely cut between 1,500 and 2,000 jobs as it realigned its business to focus on newer more profitable business segments. The cuts were expected to be completed at the end of the company's fiscal year, which ends this month.

In February, Cisco said it cut about 250 jobs at its San Jose headquarters. Cisco had 66,558 employees at the end of April. Despite the cuts, Cisco's CEO John Chambers has said publicly that he believes the worst of the recession is over. But he noted that it could take some time before spending returns to high levels. Wall Street will be watching the company's next earnings call very carefully to see signs that the bottom has been reached. Cisco will report fiscal fourth quarter and end of year earnings on August 5 after the market closes.

Hit by the economic downturn and fluctuating exchange rates, worldwide IT spending is expected to drop 6 percent this year, according to a new Gartner report.

Spending will likely settle in at $3.2 trillion for 2009, compared with $3.4 trillion in 2008. Last year, IT spending had actually surged by 6.2 percent over 2007.

Due to the ongoing recession, the projected 6 percent spending decline is greater than Gartner's original forecast of a 3.8 percent drop, which the firm made in March.

"While the global economic downturn shows signs of easing, this year IT budgets are still being cut, and consumers will need a lot more persuading before they can feel confident enough to loosen their purse strings," Richard Gordon, head of global forecasting at Gartner, said in a statement Tuesday.

This year's spending decline touches all four major IT segments tracked by Gartner--hardware, software, IT services, and telecommunications. Hardware spending will see the sharpest drop at 16.3 percent, while software spending will ease down only 1.6 percent.

For comparison, Gartner noted, a drop in all four segments did not occur during the last major downturn in 2001.

As the global economy revives, Gartner believes IT spending will shoot up 2.3 percent next year. Overall, Gartner expects IT spending to grow annually at a weak 1.9 percent rate from 2008 through 2013.

Technology stalwart Cisco Systems has begun "realigning" its workforce and has confirmed that it has started laying off workers this week.

The Wall Street Journal reported Thursday that Cisco, which sells Internet gear to communications service providers and large companies, has laid off about 250 employees at its headquarters in San Jose, Calif., this week. Other jobs in offices throughout the U.S. and overseas were also cut, the company said.

Cisco's job cuts come as other large technology companies have also laid off workers amid the deepening worldwide recession. Microsoft has already announced 5,000 job cuts over the next 18 months. And others like software maker SAP will cut about 3,000 people.

But Cisco insists these cuts are part of the company's normal course of business as it focuses on growth areas in the company.

"Cisco is constantly evaluating its business priorities, resources and overall employee alignment as part of our business management process," the company said in a statement. "This limited restructuring is part of our ongoing, targeted realignment of resources and was previously discussed on our fiscal second quarter 2009 earnings call."

CEO John Chambers said during the company's quarterly conference call earlier this month that the company would shed between 1,500 and 2,000 as it realigns the business.

Chambers insisted the company is not planning a major layoff, which he defined as cutting 10 percent or more of the company's workforce. Cisco currently employs about 67,000 people worldwide.

Like many technology companies, Cisco has been hit hard by the worldwide recession. Its revenue is slowing as its corporate customers and large communications service providers slow spending. In its second fiscal quarter, the company's revenue dipped by about 7.5 percent to $9.1 billion compared to the previous year.

And things are only going to get worse, Chambers warned. He expects sales to dip as much as 20 percent in the next quarter. That said, Chambers has also said that Cisco is well-positioned to emerge even stronger after the economic malaise. The company has been investing in new markets, such as consumer electronics and video for the past couple of years.

Instead of major workforce reductions to control costs, Cisco is focusing on reducing expenses by $1 billion by the end of fiscal year 2009. To achieve this goal it has taken a "pause" in hiring and reduced travel, offsite meetings, outside services, equipment, events, prototypes, marketing, and other activities.

One thing is clear, Cisco is in better financial position than many of its peers. In January it had about $29.5 billion in cash, and it just issued an additional $4 billion debt to help fund acquisitions.

Technology giant Cisco Systems said Monday it plans to sell $4 billion in bonds to pad its corporate wallet with cash, spurring speculation that the company is on the hunt for companies to buy. But exactly which companies it might target and how much it is willing to pay are still unknown.

Cisco has shared some general thoughts on how it plans to spend the extra cash. For one, it will use a portion of the funds to pay down its $500 million of floating rate debt that comes due this month, according to Terry Alberstein, a spokesman for Cisco.

So what will it do with the remaining $3.5 billion? Alberstein said the remaining cash will be used for "general corporate purposes," which may include repurchases of common stock, capital expenditures, and acquisitions. Most experts agree that given Cisco's long history of acquisitions, it's likely that at least some of this money will be put toward acquiring new companies.

The last time Cisco had a debt offering was in 2006 when it acquired Scientific Atlanta for $6.9 billion.

Cisco has about $30 billion in cash on its balance sheet, but most of that money is tied up overseas. But due to recent vote in Congress to tax money coming back into the United States, experts say it makes sense for Cisco to take on more debt instead of using its overseas cash.

Minus the cash it has overseas, Cisco only has about $3.2 billion of cash available to it in the U.S. While the credit markets have effectively been closed to many companies due to the economic crisis, there now seems to be pent up demand to lend to high-quality companies, such as Cisco. And because interest rates are now so low, Cisco can borrow money at very reasonable rates. And given the fact that Cisco is predicting sales to decline 20 percent in the next quarter, it makes sense that the company would bulk up its cash reserve while it can.

But many experts believe that Cisco won't simply sit on the cash and wait out the economic crisis. The company's CEO John Chambers said last week during the company's quarterly conference call that Cisco will continue to invest aggressively in new markets. And he said that the company will continue to make acquisitions as part of its strategy to move into those new markets.

But which companies might Cisco have its eye on? And how big are the potential acquisitions that the company might make? Simon Leopold, an equity analyst with Morgan Keegan, believes that Cisco is not preparing to make a huge acquisition.

"We would not be surprised if Cisco is contemplating an acquisition that could be valued at more than a few hundred million but less than 'large,'" Leopold said in a research note published Tuesday. "Cisco's CEO, John Chambers, has indicated that Cisco would probably not make large acquisitions. However, as Chambers has declined to define what constitutes 'large,' we would imagine he is referring to anything over $10 billion."

From its earliest days, Cisco has built its business on acquisitions. And it's likely to keep building its business this way. But Chambers has always been adamant that really large acquisitions don't work, so the company has traditionally made small to medium-size acquisitions.

Of course, there have been some exceptions to rule. Some of the most strategic acquisitions in recent years have been Linksys, which was bought in 2003 for $500 million; Scientific Atlanta in 2005 for $6.9 billion and WebEx in 2007 for $3.2 billion.

Leopold believes that given the current economic situation and Cisco's added cash, the company might consider an acquisition between $1 billion and $5 billion.

So what holes is Cisco looking to plug in its product portfolio and which companies might be good candidates? Cisco has been looking into several new technology areas for growth, including consumer video, virtualization software, cloud computing and data center technology.

In fact, there have already been rumors recently that Cisco is looking to buy storage partner EMC. It might also consider buying EMC's majority-owned server virtualization business VMWare. Cisco has a minority investment in VMWare. But EMC's market capitalization right now is around $24 billion and VMWare's market valuation is around $10 billion, which Leopold believes makes them too expensive for Cisco right now.

Other possibilities that could help Cisco move further into the server market include, NetApp, Sun Microsystems, Red Hat, and BMC. But these acquisitions are also likely to be pricey.

On the consumer side, it's anyone's guess who Cisco might consider as an acquisition target. The company has been all over the map in terms of its strategy in the consumer market. It initially got into that market with the Linksys home networking gear. And at the Consumer Electronics Show in Las Vegas last month is launched a new home audio product and media hub product.

The company has also been acquiring and bulking up its social media expertise. And it recently launched a new initiative to help big media companies build and manage socially interactive Web sites.

Some people have suggested that Cisco may want to buy eBay's Internet phone business, Skype. In 2006, eBay paid $2.6 billion for the company. Now the online auction Web site values Skype at about $2 billion. But because, Skype represents one of the biggest growth engines for eBay right now and is profitable, it's likely the company would be asking a premium for the service. And it's not clear how much value Cisco could get out of paying more than $2 billion for Skype and its 370 million registered users.

That said, Leopold believes anything is possible.

"Cisco's acquisition of Scientific Atlanta came as a surprise," he said. "So any deal it might make could also surprise us."

Technology bellwether Cisco Systems gave a glum outlook Wednesday as the company sharply felt the effects of the financial crisis and weakening economy during its first fiscal quarter 2009.

Cisco's CEO John Chambers told analysts and investors on a conference call after it announced its earnings that the company saw a dramatic drop in enterprise sales during the last two months of the quarter, as its customers reigned back spending in light of the financial crisis and uncertain economy.

Chambers said the downturn, which the company first saw among U.S. customers, has now spread to customers in Western Europe as well as developing markets and Asia. In the U.S., sales were down 8 percent compared to a year ago. Sales to large companies, Cisco's bread and butter customers, were down a whopping 11 percent compared to the first fiscal quarter of 2007.

Chambers also said the company saw a stark contrast in spending from August to October, when the financial crisis on Wall Street was in full bloom.

"August felt very good," he said. "September wasn't too bad. But October did slow quite a bit."

Chambers said he expects sales to continue to be slow over the next quarter, and he predicted that Cisco's revenue would dip 5 percent to 10 percent during the next quarter.

In spite of the dismal outlook, Chambers tried to reassure investors that the company, which makes routers that power the Internet, is well positioned to weather the storm. He said the company already has its "playbook" out and is preparing for the slowdown. He also noted that during the past five or six economic downturns, Cisco has always managed to emerge a stronger and better positioned company than before the downturn.

"While we all wish we didn't have to face these challenges , it's during these times that we have become stronger versus our peers," he said. "We also believe we are very well positioned, as we enter the next phase of the Internet."

Chambers said the company expects to grow even stronger once the economy rebounds. But in order to make sure it can stay viable during the downturn, Chambers said the company will have to cut about $1 billion from its spending budget. It will do this mainly by cutting costs, such as travel for its more than 67,000 employees. In mid-October it also instituted a hiring "pause."

But Chambers also emphasized that Cisco will continue to invest in new markets so that when the economy turns around, the company is ready to take advantage of increased spending. Top on the list of areas to invest in are Web 2.0 and collaboration technologies, data center technology, and video. Chambers also said he doesn't believe the economic downturn will last long.

"We wouldn't be investing as heavily as we are, if we thought the downturn would be long in duration," he said. "The next 45 days will tell us a lot."

Despite the bad news, Cisco still managed to hit analyst expectations for the quarter. The company said its sales were up 8 percent to $10.3 billion from $9.6 billion during the same quarter a year ago. This growth was in line with the company's forecast and it matched expectations from analysts.

But even as sales rose, Cisco's net profit for the quarter stayed relatively flat at $2.2 billion or 37 cents a share compared with $2.2 billion, or 35 cents a share a year ago.

Dell employees received a memo from founder and CEO Michael Dell recently asking them to take some time off without pay.

It's not meant to be punitive, but rather a measure to help the Round Rock, Texas, company save some money as the economy continues on its uncertain path. The request made to employees is also an effort to avoid possible layoffs, according to a report in the Austin Business Journal.

A Dell spokesman confirmed the memo's existence and said that it was part of a wider program of cost saving that had been instituted. Besides offering one to five days of unpaid leave, the company has also placed a temporary freeze on new hires, eliminated contract employees, and offered severance packages to workers to leave voluntarily.

Though Dell recently met its goal of cutting its employee rolls by 10 percent, the memo stated that more layoffs could be coming if these cost-cutting measures didn't achieve the desired results, which Dell did not specify.

The company recently reported a 17 percent dip in earnings after a year of showing signs of good growth.

Japanese electronics maker Pioneer is set to report wider financial losses, and has named Susumu Kotani as the company's new president.

Company board member Kotani will replace Tamihiko Sudo as president. On March 31, Pioneer will report a net loss of 78 billion yen, or $783 million, the company revealed. It will be the company's fifth straight quarter without a profit.

To cut costs, the company will lay off 2,000 workers, according to a Bloomberg report. Pioneer had already planned to stop making plasma panels for its flat-screen TVs by February 2009 (Panasonic will supply the panels instead).

Fellow Japanese electronics maker Sony also reported less-than-stellar quarterly results, and pointed to the same problems as Pioneer: a stronger yen-to-dollar conversion rate and the global economic slowdown.