Great article in New York Times on “Cisco’s Run of Spending”. The article talks about the $22 Billion of acquisitions Cisco has done since 2002 (and doesn’t even mention the billions more before that). The case is pretty damning for Cisco overall ending with the statement “After 10 years of searching for the promised land of growth, it’s time for something different. Slowing acquisitions would a good start. If the strategy’s benefit isn’t apparent after a decade of purchases, it is hard to see how it will appear magically now.” Some other key points:

• Cisco purchased $60B of stock but the outstanding shares decreased by only 1.3B (current outstanding shares = 5.79B) due to dilutive acquisitions and options.
• John Chambers (CEO) claimed growth could increase by 50% a year over the long run. Actual growth has been closer to 7% per year.
• They have 26 new product areas that could account for $1B in new revenue in near term. I don’t know how anyone can even remember 26 things to “focus” on.

I took a look at Cisco’s revenue breakdown and M&A by business unit recently. As you can see from the numbers, in the last five years M&A in the core switches and routers group has slowed down a lot as Cisco has dominant market share in those segments and there aren’t that many big companies to buy. Growth in this segment is also in single digits. Most of Cisco’s growth has actually come from acquired companies dumped into the Advanced Technologies Group (ATG) which supports the premise of the NYT article.

The telling thing is that Cisco has put all these new acquired businesses into one group rather than baking into core business units. What that really screams out is Cisco doesn’t know what to do with the acquisitions and is desperate to show growth. That’s why it needs 59 councils to manage the acquisitions. That’s why core business groups are often prevented from doing things that make sense for them, but not the new hot business in the ATG. I could be proved wrong, but I can’t see how this is sustainable from a shareholder economics or management perspective.

The other factor is that a lot of the ATG acquisitions are “end customer businesses” that drive up demand for Cisco’s core network gear and allow them to charge a premium. Great strategy ….. but what does it mean for customers? Customers get all the capabilities they expect, but in a real patchwork manner. For example, in Unified Communications, Cisco has multiple soft phone clients that don’t work in the same way, they have several meeting/conferencing products, they are schizophrenic on need for email and have now acquired a company and all the backend administration for these is different. It is hard to build a clean user friendly user experience at the best of times, but almost impossible if you are trying to do it with patched acquisitions. Cisco’s new approach is to build a middleware layer to hide the complexity and plug into companies that can be trusted with user interfaces. But that begs the question for customers on why they would want to do this when they can get an integrated solution from other vendors.

Let’s see how Cisco’s strategy goes. But initial sense is that it is bad for shareholders, bad for employees and bad for customers.