Cisco won't renew its longstanding alliance with tech giant Hewlett-Packard (NYSE: HPQ ) after its current term ends this spring. As fellow Fool Tim Beyers so lucidly explains, it no longer makes sense for Cisco to share its roadmaps and other sensitive information with a rival like HP. I'm sure HP feels the same way, now that Cisco sells server systems, but the latter company was first to cut the ties.
And now, the end is near.
If HP is a direct competitor now, then so is IBM (NYSE: IBM ) these days. Oracle (Nasdaq: ORCL ) also fits the bill, with Sun Microsystems under its wing. That's two more current Cisco partners looking likely to lose that status whenever their existing contracts run out.
I have long admired Cisco for its unmatched level of connectedness within the IT industry. Making more friends than enemies provides management with a priceless amount of insight into industry trends and future directions -- not to mention a powerful distribution network, where 80% of Cisco's sales now flow through partner agreements.
Maybe that unique insight has told CEO John Chambers to pursue this strategy, for reasons beyond my understanding. But based on publicly available information from the lowly perspective of a mere mortal, none of this makes any sense to me. Why rip the beating heart out of Cisco just to enter a new market that may or may not work out to Cisco's advantage? Some would liken it to Google going up against Apple in several markets, even as Google CEO Eric Schmidt still held a seat on Apple's board.
Google and Apple cut those ties pretty quickly, but I don't know how Cisco could ever repair the damage it's causing to its own heart and soul these days. That might sound like a heap of touchy-feely hippie talk to ardent Cisco investors, but I truly believe that Cisco is heading down a wrong track that will inflict serious damage on its lofty stock price. Furthermore, it's way too late to do anything about it.
What does the future hold?
Here's how I see Cisco's future playing out, in the light of the last year's business decisions:
- Cisco cuts its ties or seriously strains partnerships with longtime partners, including HP, IBM, Sun/Oracle, and possibly Dell (Nasdaq: DELL ) , because they are all becoming direct competitors to the New Cisco. Dell has already had some scraps with Cisco over switching equipment; IBM has moved closer to Brocade (Nasdaq: BRCD ) ; and Juniper (Nasdaq: JNPR ) also stands ready to fill any voids left by broken Cisco partnerships. Those big-name defectors could trigger an avalanche of smaller but equally important departures, as Cisco partners everywhere follow the lead of those big boys. This process takes a couple of years to play out, but it's coming as sure as death or the tax man.
- The business culture changes inside Cisco, as the old advantage of knowing more than pretty much everybody else about the technology sector's future direction evaporates. Visionary leadership turns into nickel-and-dime management, and the $140 billion ship finds itself rudderless.
- A price-to-earnings multiple in the low 20s doesn't sound preposterous for a driven growth business with a significant information advantage, but it's way too high for just another tech colossus in the mold of IBM or HP -- which is what Cisco becomes. Shareholders had better brace themselves for a huge impact to their holdings.
It could take several years, but Cisco's decision to enter the server hardware market will end up hurting shareholders, even if those server sales eventually become significant. The losses elsewhere are too deep to overcome.
This could indeed be the end of Cisco as we know it. Do you feel fine, shareholders? Discuss in the comments below.