Should Cisco make like HP, and split?

Wall Street analyst says it would kick company into gear

As is usual after an event like this week’s breakup of HP, pundits start opining on whom else should follow suit. Naturally, Cisco’s name came up in a bulletin penned this week by Mark Sue, an analyst at investment firm RBC Capital Markets, and a longtime Cisco watcher.

Sue believes Cisco should consider splitting into two entities: Cisco Solutions and Cisco Cloud. Cisco Solutions would include parts of routing, switching and services – those that are mature and profitable, and that Cisco should manage these businesses for higher free cash flow.

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Writes Sue:

Cisco Solutions could also drive industry consolidation by acquiring high cash-flow businesses, taking capacity out of the system (carriers have all the purchasing power), improve profitability metrics through cost optimization and return FCF to shareholders via dividends and buybacks. We believe this would be a great stock.

Cisco Cloud could acquire early-stage tech companies and invest in R&D for new technologies without cannibalizing Cisco’s legacy platforms, Sue posits. Cisco Cloud could pursue an expanding total available market and share gains and technology differentiation in high-growth segments such as wireless, security and data center without concerns of heavy R&D spending, he states:

We estimate an annual revenue run-rate of $10.5B that may grow 15-20% YoY.

Sue says RBC surveys indicate Cisco has too many people, takes too long to get things done and has become reactive to changing market dynamics through layoffs and restructurings that have become routine and regular over the past four years. Indeed, this is at the root of some recent high-level departures at Cisco, which has seen five senior vice presidents leave voluntarily or involuntarily over the past few weeks: Sujai Hajela, Sri Hosakote, Surya Panditi, David Yen and Chris Young.

A more proactive change – like splitting in two -- may kick Cisco into gear, and jack the stock price to a 14 year high of $40, Sue suggests. A Cisco spokesperson told Gigaom that Cisco feels “very good about our company strategy, our leadership, our innovation and our opportunities.”

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