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Jewish World Review April 12, 2001 / 19 Nissan, 5761

Cory Johnson

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Consumer Reports

How Cisco lost its shine -- Of all last week's disastrous news, including the Nasdaq hitting a 30-month low, you might have missed another big capitulation. After Wednesday's market close, Cisco quietly announced it had given up marketing its 15900 Wavelength router.

Big deal, you say?

Big deal, indeed. Cisco Systems has been the mightiest of all Internet firms, and its power to dominate any market it entered was the envy of the new economy. There were all sorts of reasons investors bought into Cisco at mind-boggling valuations over the past five years. But central among those reasons was this: If Cisco couldn't build it, it would buy it. New growth would come from new businesses. Using its bulletproof stock as currency, Cisco flaunted its ability to buy its way into any market.

But last week's announcement was a humbling admission that the growth strategy isn't working, at least not in optics.

Cisco thought it had bought its way into the optical-switching business in one massive swoop in August 1999, when it made two stunning acquisitions. In the highest price ever paid for a private technology company, Cisco paid $6.9 billion for little known Cerent, an optical transport company, and another $450 million for Monterey Networks, a 147-person optical-switching startup. The Monterey staff, stunned by how fast Cisco took them out, downed shots to celebrate their bounty.

After a while, it became clear Monterey couldn't get its switch to market. The project met delay after delay. Cisco promised it would work, but it didn't show up in the marketplace. Competitors, once afraid of incurring the wrath of mighty Cisco, began to point out its inability to ship the Monterey switch. In February, Elizabeth Perry, head of optical switching for Ciena, openly mocked Cisco's inability to ship the Monterey switch, while Ciena had 10 customers for its optical switch. The day after her speech, shares of Cisco dropped 3.6 percent to $28.50.

Last week, the stock traded at half that. The failure of Cisco isn't just the failure of an optical switch. After all, sales in the optical-switch market were less than $1 billion last year - Cisco's total revenues were 24 times that in the past year.

Investors bought Cisco's stock because they hoped the company would find new markets and dominate them. Indeed, that was the investment thesis for many of the supposed technology blue chips:, Broadcom, MarchFirst, WorldCom, Yahoo. Internet leaders would extend their lead and the growth charts would go up and to the right forever.

It didn't work out that way.

At $15 a share, Cisco trades at about 35 times last year's earnings. That suggests investors think Cisco will grow at least that fast. But analysts expect 14 percent earnings growth from the company in the coming year, and that's assuming its entry into new markets goes without a hitch.

Unfortunately, Cisco caught a hitch. Investors can only hope there aren't more to come.

Cory Johnson writes for The Industry Standard. Comment by clicking here.


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