Cisco develops much of the hardware and software now used to route voice and data traffic over the world's communication networks and can then allocate some of its core product earnings to acquire firms that offer complimentary products and services. Individuals and businesses are rapidly utilizing the net to collaborate and interact, and WebEx's products allow Cisco to provide increased product breadth for small/medium businesses. They already own Linksys, providing hardware/software for local wireless and ethernet-based networks, and recently purchased Scientific Atlanta, best known as a video/cable box maker, to augment their video products.
While Cisco "builds" the network, anything can flow over that structure - video, voice, traditional data like email, instant messaging, web pages. The firm wants to ensure that it doesn't miss out on the more lucrative products that help individuals and business leverage those networks for new purposes and services. On the flip side, CSCO/WEBX could face challenges. As TechCrunch notes, many competitors exist that have developed easier-to-use and more robust offerings at cheaper prices; Mike runs down the alternatives.
Two quick takeaways - this further confirms the reason why CSCO and other tech firms don't offer a dividend; technology changes so quickly that they need to maintain significant balance sheet flexibility. CSCO cannot commit to a dividend that they could have used for an acquisition. Secondly, investors should continue to focus on potential targets of the CSC's, MSFTs, and INTCs rather than holding the shares of large tech firms. Things got ugly for WebEx holders in 2002-2003, but the stock has risen 7-fold in the last 4 years. It quickly gained a customer base, managed its cash well, and became profitable in a fast growing sub-sector of tech.
What could be the next target? You may take a look at Anadigics (NASDAQ:ANAD), developer of communications chips with a 650M market cap, but I'm sticking with my choice of a few days ago - Riverbed Technology (NASDAQ:RVBD). After today's unexplained drop, it's getting interesting again.
Disclosure: author is long RVBD