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With the acquisition of NDS Group, Cisco (NASDAQ:CSCO) is getting bigger, expanding the scale and scope of its operations, but is it getting better in competing effectively against its peers? Is it getting better for its stockholders?
If history offers any clues, the answer is no. Over the last 15 years, Cisco has been on an acquisition spree, buying-up scores of companies every year, but has yet to come up with blockbuster products to beat competition, open up new markets, and enhance shareholder value. The company has been losing market share to Juniper Networks (NYSE:JNPR) and Alcatel-Lucent (NYSE:ALU); and its stock still trades close to 70 percent below its all time high in 2001.
The trouble with an aggressive acquisition strategy is that it is usually costly and unsustainable, especially when applied to the high-tech industry that competes on breakthrough innovation. It is costly because would-be acquirers end up buying companies that either fail to produce any marketable products, or are behind the curve compared to early-movers. It is unsustainable because it often ends up fueling bidding wars, as the owners of these smaller companies demand higher and higher premium to compensate them for the risks they assume. Cisco ended up paying top prices for Net Speed and Growth Networks acquired at the peak of the high-tech bubble. Acquisitions further ended up being dilutive to existing stockholders when paid with the issuing of new stock. That’s how Cisco ended up with 5.4 billion shares—though the most recent acquisition was paid with the company’s overseas cash.
Cisco isn’t the only high-tech company that pursued an aggressive acquisition strategy; Hewlett-Packard (NYSE:HPQ) is another, sharing a similar fate. In 2001, HP purchased Compaq Computer to compete effectively against Dell Computer (NASDAQ:DELL). In April 2010, HP purchased the near-bankrupt Palm to compete against Apple that enjoyed the first-mover advantage in this market. Recently, HP acquired enterprise software maker, pitting the company against three early market movers, Salesforce.com (NYSE:CRM), Oracle (NASDAQ:ORCL), and IBM (NYSE:IBM).
Cisco’s and HP’s strategy is radically different than that of other technology companies that have resisted the temptation of going on acquisitions sprees. Corning Inc. (NYSE:GLW), Apple (NASDAQ:AAPL), and Google (NASDAQ: GOOG), for instance, have been coming up with the one innovative product line after the other, rather than buying-up start-ups.
The bottom line: Acquisitions have helped Cisco expand the scale and scope of its operation, but have yet to turn the company into a better competitor that enhances shareholder value.
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