Fayda Khalek

Cisco: Hedging rather than betting

Cisco SystemsBy Executive MBA students Marc Simony, Sherrie Zollinger, Kellie Teelander, Casey Hirschman, Fayda Khalek and Dewan Simon

What do you do when you have $40 billion in the bank, net profits of $7.7 billion, an average annual unlevered free cash flow of around $9 billion, the world economy in shambles, and you need to continue to grow because stagnation will kill your stock price?

At Cisco Systems, Inc. (NASDAQ: CSCO) you announce a $10 billion share buyback to protect your stock price, and you try to maximize your sunk costs and IP (pun intended; both Intellectual Property and Internet Protocol). Cisco has a plethora of business units, but most are geared toward supporting packet flow over Cisco’s core business — networking infrastructure. Networking infrastructure, in this case, represents a large portion the sunk costs, because sold gear does not return any post-sale revenue scaled to the use and value it provides the purchaser.

Cisco doesn’t want to just sell shovels; it wants to be part of the gold rush. The easiest solution would be to attach a packet meter to Cisco’s switches and routers, give them away for free, and charge for their utility. It is unlikely, however, that businesses would buy into this. Option two would be for Cisco to “stuff” the network pipe and exhaust its use, leading to higher online capacity demand, and  enabling Cisco to sell more of its routers, Unified Computing Systems, and cloud-enabling virtualization technology—the full data center stack!

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