Gleacher & Co. analyst Brian Marshall drew some notice earlier today when he wrote that Cisco could slash as many as 5,000 positions, about seven percent of its workforce, next month. Marshall estimated that the cull “could incrementally reduce Cisco’s pro forma operating expenses by about $1 billion annually.”
Cisco Confirms Cuts
Marshall said the estimates were his own, based on what he believed Cisco needs to do to meet its meet its $1-billion objective for reduced annual expenses. Cisco later confirmed that job cuts are coming in August, though it did not indicate how many employees would be affected. Previously, Cisco had been encouraging employees to take early-retirement packages.
At the same time he made his projections about how many workers Cisco might need to jettison, Marshall also speculated that Cisco should seek a “transformative merger” with EMC. On that theme, Marshall apparently opined that a combination with EMC would give Cisco “better exposure to enterprise storage trends, ownership of the VMware asset for virtualization, a more robust security offering and a better collection of IT service professionals.”
I included the qualifier “apparently” in the preceding sentence because it seems Bloomberg and BusinessWeek, which both earlier today published a report including references to Marshall’s musings regarding a Cisco takeout of EMC, have excised any mention of EMC from subsequent iterations of the coverage.
Marshall’s M&A Advice Disappears
It’s hard to tell what that means, if anything. All I know is that the earliest version of the story included reference to Marshall’s advice that Cisco buy EMC, and later iterations of the story made no mention of EMC. It’s odd, but strange things happen when news is published in realtime.
Presuming I did not hallucinate — and a report by Jim Duffy over at NetworkWorld suggests I did not — what are we to make of Marshall’s recommendation? Well, it wouldn’t the first time somebody has suggested that Cisco acquire EMC, and it probably won’t be the last. The conjecture or rumor (or whatever else you want to call it) has had more comebacks than Brett Favre. It’s an old chestnut that gets repeated plays on analysts’ virtual jukeboxes.
Given its current valuation, though, EMC probably isn’t going anywhere. At the conclusion of stock-market trading today, EMC had a market capitalization of more than $56.1 billion, whereas Cisco had a market capitalization of $84.8 billion. Cisco has made a few sizable acquisitions in its time — though it established its wheeler-dealer bones on smaller, bite-size technology buys — but it never has done a deal on the gargantuan scale that would be required to land EMC.
Cisco’s Repatriation Holiday
What’s more, Cisco still has most of its cash overseas, It’s lobbying the U.S. government assiduously for a repatriation tax holiday, but that break hans’t been accorded yet. Even if Cisco were desperate enough to abandon its old acquisition playbook and splash out obscene amounts of cash and stock for EMC — and, for the record, I think Cisco is teetering on the cusp of becoming seriously desperate — it is not in a position to make the move until its overseas cash hoard (of approximately $31.6 billion) has been repatriated.
Even then, does EMC want to sell? Like every other vendor out there, EMC faces daunting challenges as the ascent of cloud computing realigns the data-center landscape. Still, one could make a compelling case that EMC, with its storage leadership and its 80-percent-plus ownership of VMware, is better placed than most vendors, including Cisco, to survive and even thrive in that brave new world. Does it really want to take Cisco stock — any deal would have to involve Cisco shares as well as cash — as part of a potential transaction? I don’t see it happening.
Dividing the Spoils
Cisco might have concerns regarding its share of the spoils from its Virtual Computing Environment (VCE) joint venture with EMC, which perhaps partly explains why it has partnered increasingly aggressively with NetApp on the FlexPod converged infrastructure architecture. Nonetheless, Cisco isn’t in a position to buy EMC, and EMC isn’t willing to part with its majority-owned VMware, so even a more modest deal is off the table.
Could Cisco buy NetApp? It could, but such a move would entail a different set of consequences, risks, and rewards, all of which we will save for another post.