Why Cisco Should Pay Me to Stay

A couple of weeks ago I wrote an article pleading for the removal of Cisco (CSCO) CEO John Chambers. Clearly at this juncture in the company, it appears that only his dismissal can re-energize the stock price. So I issued an ultimatum demanding that either he goes or I go. I sent a lengthy email to Mr. Chambers that chronicles some of his missteps as a way to explain why I have come to feel that his stepping down is in the company’s best interest. I have yet to hear back, but I don’t suppose I will get a response any time soon. Nevertheless, I will keep you posted. But now, I'm willing to take cash to stay, or as Tom Cruise once said, "show me the money."

Over the weekend I made a stunning discovery. Longtime consumer activist Ralph Nader and I have something in common; we are both frustrated Cisco shareholders. According to the Wall Street Journal, Mr. Nader also sent a letter to John Chambers expressing his frustration over the company’s lackluster performance over the past decade. In his letter sent on June 13, Mr. Nader reprimanded John Chambers for not only his poor execution but he also demanded that Cisco share its cash with its shareholders. In his letter, Nader wrote:

It is time for a long-overdue Cisco shareholder revolt against a management that is oblivious to building or even maintaining shareholder value

It is very rare that a public personality would call out an officer of a company in this manner. Nader has had a history of altruism; that is how he has made his name, upon which he once ran for president. But I would be naïve to think this is one of these examples. You see, Nader has been a Cisco shareholder since the peak of the dot.com bubble in 2000. His Cisco holdings were once valued at approximately 1 million and are now worth a paltry $270K. Nevertheless, whether his motives are altruistic or not, the message to John Chambers is being sent from all levels; shareholders demand better results or some cash. I don’t mind being pacified until better execution reverses the stock’s trend.

On March 19 Cisco “reluctantly” agreed to pay a modest $0.06 quarterly dividend with the first payout being issued to shareholders on April 20. I say “reluctantly” because investors have been demanding it for years before it was approved. But as I have written previously, the company didn’t really have a choice but to relent. To its credit Cisco has attempted some means of increasing shareholder value through a combination of both a 5% cash buyback and the recent dividend.

The company continues to face questions about the strength of its core networking business. Sometime it reminds me of an athlete who is still good enough to start for the team, but is just no longer an all-star caliber player. It seems Cisco has a hard time dealing with age. The company is now considered “mature” and is simply no longer a growth business. The sooner executives realize this, the more they will be able to adapt to not only their execution needs, but also the demands of their shareholders. This is what John Chambers has yet to realize and hopefully Mr. Nader was able to translate by calling for a revolt.

According to Yahoo Finance, Cisco has $43.37 billion cash on hand. As nice as the dividend would be, I think the cash would be better served to make one more acquisition that I think would put the company well in position to dominate cloud traffic for years to come. Cisco should buy Level 3 (LVLT) Communications. I’ve said this in a previous article and I can’t help but think how the two companies can benefit one another. Also, consider the fact that Cisco already has its bread-and-butter networking components as well as a growing server business, acquiring Level 3 would allow it to become an “end-to-end total service solution” provider that rivals that of IBM (IBM), Oracle (ORCL) and Hewlett-Packard (HPQ).

Summary

When one looks at Cisco from a fundamental perspective, one will see a company with $25 billion of net cash that trades at less than nine times earnings, which has provided double-digit returns on capital, and is still a dominant player in its industry; fundamentally, the company is strong. The stock continues to languish but I still recommend it as a buy from a fundamental perspective; frankly it remains cheap at under $15 per share.

In my last article demanding Cisco make a decision between John Chambers and me, I told investors that I am willing to give the company through December of this year to turn things around; or just under 6 months. But if Ralph Nader is proven to have the ear of John Chambers, investors may not have to wait so long. I agree with Mr. Nader, Cisco should pay me to stay.

Disclosure: I am long CSCO, ORCL.