Re-routing Cisco

Last week one of the most respected CEOs in Silicon Valley, John Chambers, admitted that Cisco Systems had lost it’s path (only a true geek would recognize that pun) and was planning to do something about. I figured Cisco would take some time to make those changes and then I could write about it, but John has already started the process by scrapping the Flip camcorder division. The interwebs lit up when it was announced and most of the comments were along the lines of “who couldn’t see that coming.”

As a past employee of Cisco I think John is a stand-up guy and a VERY charismatic speaker. I would joke with people that if John told us to sell cocaine, I would because he was so persuasive. However, as a shareholder of Cisco I think John really needs to clean house and take a hard look at the direction of the company and more importantly look in the mirror.

Since John’s admission, many columns have been written about what ails Cisco. Most articles are going for the low hanging fruit such as get rid of the consumer focused product line and get back to basics with enterprise and service provider customers. But there is a much bigger issue that goes to the heart of Cisco – people.

Executive Departures
John has been around since 1991 and has had the top spot since 1995, he runs a tight ship and probably to tight of a ship. So much so, that I believe many top executives are leaving because he won’t give up the throne.  The list of departing executives include Tony Bates (left for Skype), Sue Bostrom, Judith Estrin, Charles Giancarlo, Kevin Kennedy, Don Listwin, Carl Russo, Jayshree Ullal and Mike Volpi to name a few.

Failed M&A Strategy
Cisco was once hailed for it’s inorganic growth via their M&A (mergers and acquisitions) strategy. That strategy worked early on for Cisco when it acquired companies such as Crescendo (the heart of their LAN switching platform), Kalpana, Grand Junction, StrataCom (WAN switching IGX platform) and Calista (IP phones). Most of these deals took place on Mike Volpi’s watch when he used to run the M&A group. In a Fortune Magazine article back in May 15, 2000 they called Volpi the Cisco M&A wunderkid.  Volpi had a great reputation within Cisco of being super bright and potentially could have led Cisco.

But, over the past 7-8 years that strategy has been a complete disaster with acquisitions such as Scientific Atlanta, Linksys and Pure Digital Technologies (Flip camcorder line). It appears many of the consumer focused acquisitions happened under Ned Hooper, the recent M&A head. It’s easy to say the strategy was completely flawed in hindsight, but Ned took a chance and unfortunately it didn’t work out. However, a lot of money was flushed down the toilet in running this experiment. Little known acquisitions such as Monteray Networks were shut down within a year of signing a $500 million term sheet. Internally, Cisco talked about how quickly they could integrate these new companies into the Cisco machine. Unfortunately, many founders of these companies left just as quickly and started new companies. Such as Dev Gupta who sold two companies to Cisco, Dagaz and MaxComm in 1997 and 1999 respectively.

Cisco Globalization Center East
I get annoyed every time I read an Indian business magazine and Wim Elfrink is talking about how he re-located to India to setup Cisco’s second biggest campus.  It’s a catch-22, is Cisco East something truly revolutionary? If so, then please communicate that better to the world so we can learn. If it’s not revolutionary then get over it, many large technology companies do it all the time – it’s called cost arbitrage.

In summary, John Chambers has one goal and that is to keep his shareholders happy which has not been happening. Cisco was the internet darling in the 90’s and all the way to March 25, 2000. On that day, Cisco became the largest company by market capitalization in the world at USD 579.2 billion, few companies can say that. Since then it’s a different story, if you bought Cisco in April 2001 you should have paid around USD 18.00 a share which is exactly where it is today in April 2011…over those 10 years it hit a low of USD 9.50 and a high of USD 33.00. Compare that to Apple, in April 2001 you would have paid USD 12.00 a share and now it is hovering around USD 330.00…the lure of the consumer market.