Daily Archives: August 6, 2009

Should Cisco Break Up?

Earlier today, I asked whether Cisco, in its continuous pursuit of new growth markets, might be spreading itself too thin.

After reading a Wall Street Journal piece by Ben Worthen and an impassioned commentary on that article by Henry Blodget, I strongly suspect that I was asking a salient question.

Well, a blind squirrel sometimes finds an acorn, a stopped clock is right twice a day, and a pauper occasionally wins a lottery. So I suppose it’s theoretically possible for me to stumble onto the path of relevance.

Anyway, as Worthen’s WSJ article explains, Cisco CEO John Chambers is being driven to pursue growth in new markets like a thoroughbred racehorse under the stinging whip of a maniacal jockey. (The metaphorical jockey would be the big-money investors with sizable stakes in Cisco.)

As Cisco’s established markets slow to a crawl — or go the wrong way — during this punishing downturn, the company keeps looking for new revenue sources, often in businesses far removed from the foundation of enterprise networking on which Cisco was built.

To manage these proliferating new businesses — more than two dozen and counting — CEO John Chambers has replaced Cisco’s conventional top-down decision-making structure with a labyrinthine edifice of committees staffed by the company’s top executives. Cisco has 59 of these committees.

Blodget thinks Chambers has lost his mind.

Rosabeth Kanter, a professor at the Harvard Business School, thinks judgment should be withheld. Says she:

“Cisco is in the middle of something that isn’t yet completed. Everything can look like a failure in the middle.”

The syntax of her last sentence is somewhat tortured (or, to be politically correct, interrogatively enhanced), and it can lead to some disturbing misinterpretations. Still, I understand her point. It’s just that I respectfully don’t agree with it.

Cisco has reached a point where it has become unwieldy, awkwardly spreading in so many disparate directions — video cameras over there, switches and routers here, and digital-signage networks somewhere else — that the center cannot hold. It will get worse, too, as this excerpt from the WSJ piece makes clear:

Mr. Chambers said he will soon expand the number of new businesses Cisco is targeting to 50. Cisco will increase the number of people who participate in the committees from 750 senior employees to about 3,000.

Blodget argues cogently that it’s for Cisco to break up the company.

Cisco is now a $40 billion company. It is extremely rare for $40+ billion companies to grow at impressive rates (which is why John has implemented this nutbag new management structure). But there is no law that says companies have to stay bigger than $40 billion.

The consumer and enterprise businesses are still radically different animals. Cisco should just bust itself in two, putting all the consumer-y stuff in one business and the enterprise stuff in the other.

That seems to make sense, doesn’t it? The alternative is the continuance and possible mutation of the Cisco committee structure illustrated below.

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Rumors of EMC Interest in McAfee

McAfee is mentioned frequently as an acquisition target. The rumor du jour is that EMC is now a serious suitor.

It’s plausible on a couple levels.

First, there are personal (and personnel) connections at the executive level between the two companies.

Dave DeWalt, McAfee’s CEO and president, is a notable EMC alumni, as are David Milam, McAfee’s chief market officer; Michael DeCesare, McAfeee’s VP of worldwide sales; and Joseph Gabbert, the company’s VP of human resources. Having knowledge of both companies — including an understanding of their cultures and processes — these executives could ensure a successful post-acquisition integration.

More important, McAfee would fit strategically into EMC, which already offers security products, plus solutions contiguous to security. For example — in addition to its existing information-security products — EMC offers solutions for archiving, availability, and compliance.

Its security offerings, derived primarily from its acquisition of RSA, include access control, authentication, credential management, data-loss prevention, encryption and key management, fraud prevention, physical security, and security management.

During a recent conference call with analysts, EMC CEO Joe Tucci said he expects industry consolidation to continue, but he declined to cite specific areas where EMC might make acquisitions.

Tucci also said EMC had no glaring holes in its offerings, but that it is “always looking for opportunities.”

Opportunities that EMC already has identified and is pursuing include building next-generation virtualized data centers, cloud computing, virtual clients and servers, and next-generation backup and recovery.

In that context, it is interesting to note that McAfee has been working diligently to build a complete portfolio of cloud-security solutions. After announcing its acquisition of security-service vendor MX Logic, McAfee proclaimed that it possessed the “most comprehensive cloud-based security portfolio in the industry.”

Regardless of whether one agrees with that assessment, McAfee certainly is trying to grow into the role.

With EMC’s focus on cloud computing and virtualization, it is within the realm of possibility that EMC would find McAfee’s cloud-computing security solutions attractive complement.

Regardless of whether the acquirer is HP, EMC, or even IBM, it is increasingly difficult to envision McAfee remaining independent for much longer.

Wiil Cisco Spread Itself Too Thin?

Public companies, such as Cisco Systems, must grow. If they don’t grow, investors will punish them by taking their money elsewhere in pursuit of better returns on investment. Without the lifeblood of investment, companies cannot grow, and their options become constrained.

It’s a law of public-market inertia. Woe betides those who don’t provide investors with steady growth.

At an elemental level, that’s why Cisco Systems has chosen to tackle HP and IBM in the data center, why it is trying to expand its data-center presence from networking gear into servers and storage, made available to customers in one convenient package.

Actually, I understand the motivation, and can I even see how Cisco, despite the considerable risks involved, could do more than well enough to justify the effort.

Something else is bothering me, though.

While reading a post-earnings news article from Bloomberg, this excerpt quoting Yahoo CEO Carol Bartz struck me:

Cisco is going after markets that are all linked to networking and sharing information, said Carol Bartz, CEO of Yahoo! Inc. and lead director at Cisco since 2005.

“John has a really clear vision, and he organizes the company around the vision,” Bartz said in an interview this week. “He inspires the naysayers.”

My question is, what won’t be networked? Practically everything in the future will have an IP address. I exaggerate here, but not by much.

This raises questions as to whether Cisco will experience imperial overstretch. Can the company really expand into every market that is “linked to networking and sharing information”? That would mean competing and winning — because, let’s face it, Cisco isn’t content to merely have a presence in a space — in a large number of markets, some having little (except the common denominator of connectivity) to do with others.

Buyers in each of these markets will behave differently from those in others, too.

In the same Bloomberg story, Arista Networks CEO Jayshree Ullal, who reported to Chambers at Cisco for many years, makes the following point Cisco’s push for data-center hegemony:

One challenge for Cisco will be persuading clients to buy one product that comprises storage, networking and servers. Customers typically have different managers responsible for making those purchasing decisions, said Jayshree Ullal, CEO of startup Arista Networks Inc., who worked at Cisco for 15 years and reported to Chambers. The global recession also may complicate Chambers’s plans, she said.

“Everyone retrenches in a bad economy, so his timing might be off,” Ullal said in an interview from Menlo Park, California. “This is by far his most difficult endeavor.”

Perhaps so, but all the new endeavors seem difficult. Each one brings unique challenges.

Through its acquisition of Pure Digital Technologies and that company’s Flip video camera, Cisco has entered consumer electronics, a new area for the company requiring a new set of skills and invoking new competition. Cisco’s foray into smart-grid technology similarly takes it into unfamiliar territory. Cisco has gotten into digital signage and other markets, too.

Chambers says more diversification is on the way, yet other network-related markets on the Cisco horizon.

Betting against Cisco probably isn’t a wise proposition. A cursory review of the company’s past performance demonstrates that it usually meets its market objectives.

Still, one has to wonder whether the pursuit of growth in an unbounded number of network-related markets eventually will lead to a diffusion of focus and a dulling of purpose.

Can Cisco buck the trend and turn the age-old adage of its head? Can it become the master of all trades and the jack of none?