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Wall Street calls for splitting Cisco into 2 separate businesses

"Big layoffs and restructuring have become routine for the past four years. A more proactive change may kick Cisco's underperforming stock into gear."

New York City:   Mon, 10/6/14 - 5:06pm    View comments

RBC Capital Markets Equity Research Report

Mark SueCiscoToday, RBC Capital Markets Managing Director, Mark Sue, called for Cisco to be split into the following 2 separate businesses:

1. Cisco Cloud

2. Cisco Solutions

Here's how Sue explained it:

"Cisco, similar to GE, is too big and has been too slow to combat an onslaught of nimble players. We've seen new entrants and smaller competitors take a technology lead with Cisco then playing catch-up.

"A dramatically different structure may be needed to unlock Cisco's potential and accelerate its pace. Cisco's investors are value-focused, looking for cash-flows, while growth investors focus on top-line growth vs. margins.

"We think splitting Cisco into two, one with a cash-generation focus and the other with a growth focus, could provide a higher target for the shares and also potentially make for a much more nimble organization."

Sue continued:

"Growth and innovation from Cisco Cloud.

"Cisco Cloud could pursue bold deals to acquire early-stage tech companies and invest in R&D to drive growth from new technologies and solutions without concerns about cannibalizing Cisco's legacy platforms.

"Cisco Cloud could pursue an expanding TAM, share gains and technology differentiation in high-growth segments such as wireless, security and data-center without concerns of heavy R&D spending; we estimate an annual revenue run-rate of $10.5B that may grow 15-20% YoY. Peers would be faster growing comps with high revenue multiples (think Arista, PANW etc.)

"Cash generation from Cisco Solutions.

"We believe Cisco could separate parts of its routing, switching and services into Cisco Solutions which are mature and profitable and manage these businesses for higher FCF.

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 higher FCF to shareholders via dividends and buybacks. We believe this would be a great stock."

Sue then concluded:

"Let there be change.

"Our surveys show Cisco has too many people, often takes too long to get things done and has become reactive to changing market dynamics.

"Big layoffs and restructuring have become routine for the past four years. A more proactive change may kick Cisco's underperforming stock into gear."

Related document:

HP Press Release: HP To Separate Into Two New Industry-Leading Public Companies

Related story:

Network World: Should Cisco make like HP, and split?

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