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Can Cisco keep up its shopping spree?

Despite a sharp decline in its stock price, the networking-equipment leader shows no signs of retreating from its long-running strategy of buying companies.

Despite a sharp decline in its stock price, Cisco Systems shows no signs of retreating from its long-running strategy of buying companies.

Cisco earnings preview
Seth Spalding, analyst, Epoch Partners
But if the networking-equipment leader's stock continues to slip, Cisco's spending sprees may fall under increasing scrutiny. That strategy could face opposition if the company's earnings report after the close of market Monday falls short of expectations.

Because of Cisco's bellwether status, investors across the stock market will be watching the San Jose, Calif-based company closely. Since mid-July, its stock price has fallen from $69.63 to the mid-50s.

Acquisitions have been the lifeblood of Cisco's growth. From its early days, when it branched out from its router focus to build a multibillion-dollar switching business through acquisitions to its current strategy of buying its way into the optical networking market, the company has used its high-flying stock to access new market niches. The company has bought 15 to 20 companies per year for the past few years, and is on track to purchase between 20 and 25 companies this year.

"Cisco's acquisition strategy supports our efforts to be technology leaders in key markets," a Cisco representative said. "We have had no reason to change our acquisition strategy."

Most analysts expect Cisco to continue with its spending spree, although the low stock price could affect the company's ability--as well as that of competitors such as Nortel Networks and Lucent Technologies--to buy expensive companies.

Cisco has made some large acquisitions in the past, including last year's $7 billion purchase of Cerent and this year's $5.7 billion acquisition of ArrowPoint Communications. But most of Cisco's recent purchases are relatively inexpensive, in the $300 million to $500 million range, said analyst Mark Edelen, of Thomas Weisel Partners.

"The size of their acquisitions could be affected, but since January, if you take away ArrowPoint, the size of their acquisitions has been on the smaller side," he said. "If the technology is critical, they'll go ahead with the acquisition. It's part of their culture and inherent in their growth strategy."

Cisco purchased CAIS Software Solutions, a subsidiary of CAIS Internet, last month for $170 million in stock, representing the company's 20th acquisition of the year. Cisco's 18th and 19th acquisitions came in September when it purchased two other software providers, Vovida Networks and IPCell Technologies, for a total of $369 million in stock.

Analyst Megan Graham-Hackett, of S&P Equity Group, agrees Cisco's stock price might hamper its ability to buy high-priced start-ups. But she said Cisco is in good shape because its rivals Nortel and Lucent have also been hit hard in the stock market. Potential acquisition candidates, such as optical networking companies, have also seen their stock prices fall.

"The other big players are all suffering from depressed valuations, so Cisco is doing well. They still have a nice valuation," Graham-Hackett said.

Acquisition candidates could also be wooed by Cisco's sales and marketing muscle, its penchant for being able to integrate acquisitions well, and its sustained sales growth. The company is expected to report strong first-quarter revenue growth Monday.

"Smaller companies may want to be part of a larger corporation with deep pockets and distribution channels," Graham-Hackett said. "And employees may be attracted at getting Cisco's stock options because Cisco's shares are at a (cheaper) price now."

Dataquest analyst Tim Smith said Cisco's ability to buy companies may be hampered temporarily by its stock price. But he believes Cisco won't hesitate to make acquisitions if the company needs the technology. Analysts believe Cisco is interested in buying more optical networking and wireless technology, two exploding markets in the networking industry.

"With their stock price being less valuable, it might be a tougher nut to swallow, but they can still do it and won't hesitate if an acquisition opportunity has a long-term benefit," Smith said. "Cisco is very adept at making acqusitions and turning them into moneymakers."

News.com's Ben Heskett contributed to this report.