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Is Cisco fattening its wallet for acquisitions?

Cisco Systems said this week it plans to raise $4 billion in cash to fill its coffers, leaving many industry watchers to speculate about potential acquisitions.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
4 min read

Technology giant Cisco Systems said Monday it plans to sell $4 billion in bonds to pad its corporate wallet with cash, spurring speculation that the company is on the hunt for companies to buy. But exactly which companies it might target and how much it is willing to pay are still unknown.

Cisco has shared some general thoughts on how it plans to spend the extra cash. For one, it will use a portion of the funds to pay down its $500 million of floating rate debt that comes due this month, according to Terry Alberstein, a spokesman for Cisco.

So what will it do with the remaining $3.5 billion? Alberstein said the remaining cash will be used for "general corporate purposes," which may include repurchases of common stock, capital expenditures, and acquisitions. Most experts agree that given Cisco's long history of acquisitions, it's likely that at least some of this money will be put toward acquiring new companies.

The last time Cisco had a debt offering was in 2006 when it acquired Scientific Atlanta for $6.9 billion.

Cisco has about $30 billion in cash on its balance sheet, but most of that money is tied up overseas. But due to recent vote in Congress to tax money coming back into the United States, experts say it makes sense for Cisco to take on more debt instead of using its overseas cash.

Minus the cash it has overseas, Cisco only has about $3.2 billion of cash available to it in the U.S. While the credit markets have effectively been closed to many companies due to the economic crisis, there now seems to be pent up demand to lend to high-quality companies, such as Cisco. And because interest rates are now so low, Cisco can borrow money at very reasonable rates. And given the fact that Cisco is predicting sales to decline 20 percent in the next quarter, it makes sense that the company would bulk up its cash reserve while it can.

But many experts believe that Cisco won't simply sit on the cash and wait out the economic crisis. The company's CEO John Chambers said last week during the company's quarterly conference call that Cisco will continue to invest aggressively in new markets. And he said that the company will continue to make acquisitions as part of its strategy to move into those new markets.

But which companies might Cisco have its eye on? And how big are the potential acquisitions that the company might make? Simon Leopold, an equity analyst with Morgan Keegan, believes that Cisco is not preparing to make a huge acquisition.

"We would not be surprised if Cisco is contemplating an acquisition that could be valued at more than a few hundred million but less than 'large,'" Leopold said in a research note published Tuesday. "Cisco's CEO, John Chambers, has indicated that Cisco would probably not make large acquisitions. However, as Chambers has declined to define what constitutes 'large,' we would imagine he is referring to anything over $10 billion."

From its earliest days, Cisco has built its business on acquisitions. And it's likely to keep building its business this way. But Chambers has always been adamant that really large acquisitions don't work, so the company has traditionally made small to medium-size acquisitions.

Of course, there have been some exceptions to rule. Some of the most strategic acquisitions in recent years have been Linksys, which was bought in 2003 for $500 million; Scientific Atlanta in 2005 for $6.9 billion and WebEx in 2007 for $3.2 billion.

Leopold believes that given the current economic situation and Cisco's added cash, the company might consider an acquisition between $1 billion and $5 billion.

So what holes is Cisco looking to plug in its product portfolio and which companies might be good candidates? Cisco has been looking into several new technology areas for growth, including consumer video, virtualization software, cloud computing and data center technology.

In fact, there have already been rumors recently that Cisco is looking to buy storage partner EMC. It might also consider buying EMC's majority-owned server virtualization business VMWare. Cisco has a minority investment in VMWare. But EMC's market capitalization right now is around $24 billion and VMWare's market valuation is around $10 billion, which Leopold believes makes them too expensive for Cisco right now.

Other possibilities that could help Cisco move further into the server market include, NetApp, Sun Microsystems, Red Hat, and BMC. But these acquisitions are also likely to be pricey.

On the consumer side, it's anyone's guess who Cisco might consider as an acquisition target. The company has been all over the map in terms of its strategy in the consumer market. It initially got into that market with the Linksys home networking gear. And at the Consumer Electronics Show in Las Vegas last month is launched a new home audio product and media hub product.

The company has also been acquiring and bulking up its social media expertise. And it recently launched a new initiative to help big media companies build and manage socially interactive Web sites.

Some people have suggested that Cisco may want to buy eBay's Internet phone business, Skype. In 2006, eBay paid $2.6 billion for the company. Now the online auction Web site values Skype at about $2 billion. But because, Skype represents one of the biggest growth engines for eBay right now and is profitable, it's likely the company would be asking a premium for the service. And it's not clear how much value Cisco could get out of paying more than $2 billion for Skype and its 370 million registered users.

That said, Leopold believes anything is possible.

"Cisco's acquisition of Scientific Atlanta came as a surprise," he said. "So any deal it might make could also surprise us."