Cisco Could Be on the Prowl

Cisco sees the same economy we see, but with a twist: it sees an opportunity to literally cash in on the financial crisis and make acquisitions that could make some of its partners, especially Microsoft, pretty uncomfortable.

Given its stated ambitions in the data center and unified-communications spaces, it’s possible the company could have its eye on a larger stake in VMware, the leader in server virtualization, or Digium, which makes the kind of switching equipment that can be used to merge computing and telephony service through the Internet. Acquiring either or both would significantly bolster Cisco’s ability to offer merged voice and data services.

Cisco raised its cash hoard to $29.5 billion yesterday by selling $4 billion of highly-rated bonds from its portfolio into a market craving a surer thing than some of the junk that’s been floating around. It’s hard to see why the company would part with solid investments unless it figures it might have a use for the cash in the fairly near future.

Given its aggressiveness and solid finances, there aren’t that many companies Cisco couldn’t buy for cash at this point. Cisco hasn’t been shy about its ambitions, either. In its most recent quarterly filing, the company stated: “During the economic downturn, we will attempt to prudently take advantage of opportunities to capture market transitions, and to put our assets to use in existing and new markets as the recovery occurs.”

Taking advantage of market transitions, by the way, is another way of saying, “buy low, sell high.” Cisco CTO Padmasree Warrior expanded on this notion last month in her blog:

We view periods of economic uncertainty as the perfect time to challenge the status quo and evolve our business to deliver customer and shareholder value.  Cisco’s success has always been driven by investments in market adjacencies during times that may cause other companies to blink.

That SEC verbiage mirrored what I’ve heard Cisco CEO John Chambers say on several occasions in recent years: The company’s investment strategy will reflect increasing customer interest in “collaboration and networked Web 2.0 technologies that enable user collaboration.” In other words, Cisco wants to provide those merged data and voice services that it sees as the future of the Internet.

Which brings me back to my earlier point about Microsoft. Chambers has a lilting southern charm when he speaks, but there’s no mistaking his willingness to be downright un-neighborly. I remember seeing him sharing a stage with Steve Ballmer less than 18 months ago, being interviewed by Charlie Rose about the collaboration between Microsoft and Cisco. The two companies had just announced a partnership in unified communications, which essentially allows users to do all their communicating, from email to voice to IM, through a single console — usually the PC.

But even in that setting, Chambers was very clear that he would compete with Microsoft in this very arena if he saw an opportunity. Now that opportunity seems to be looming. Canadian networking giant Nortel, Microsoft’s other partner in this space — the one it was counting on to get its sales force into the telephony business — is currently looking for a way out of bankruptcy protection. That’s not exactly the best way for either company to inspire confidence in buyers. And Microsoft is itself facing increasing competition in browsers, productivity applications and servers.

One possible acquisition target for Cisco could be Digium, which just introduced new unified communications features to its Asterisk IP-PBX — an Internet-based exchange that can move both phone calls and data over a corporate network — and which has a very strong presence in the small and medium-sized business space.

Another possible way Cisco might spend its cash is to acquire a bigger stake in virtualization leader VMware, of which it already owns almost two percent. Virtualization allows IT administrators to consolidate server space by partitioning one physical computer into multiple “virtual” servers, each running as if on its own dedicated machine and independently of the others.

Why VMware? Warrior suggested that Cisco is introducing a new approach to data-center architecture called “Unified Computing” that would make it easier for IT administrators to introduce virtualization into their increasingly complex data centers by linking disparate resources ‘in a common architecture.”

Keep in mind that Cisco paid $150 million for its VMware stake in July 2007, when VMware shares traded at around $70. Today, VMware opened at $25.66. Now that’s a buying opportunity.