Will Cisco's Cuts Make a Difference?

It looks as though Cisco Systems (Nasdaq: CSCO  ) isn't afraid to take drastic action after all.

Last week, Gleacher analyst Brian Marshall predicted that the networking colossus would drop perhaps 5,000 names off its payroll to slim down its cost structure. Later, Bloomberg reported a bigger program with as many as 10,000 cuts. As it turns out, both reports were pretty much on the money.

You see, the final tally stands at some 6,500 outright layoffs and early retirements, in the ballpark of Marshall's forecast. The last 5,000 reductions come from selling a set-top box factory in Mexico to Taiwan-based electronics manufacturer Foxconn. So there's your 11,500 slim-downs, or just about what Bloomberg was talking about. Feathers in hats, all around.

Nicely done, Cisco -- that's how you stir the pot.

Cisco expects to save about $1 billion a year on these cuts, though Marshall sees an even larger impact -- reductions on this scale should save as much as $1.7 billion a year by his estimates. Either way, it's a significant improvement for a company that reported $7.8 billion in net income in 2010.

This also changes the competitive landscape in networking. Cisco promises severance pay and outplacement assistance to affected employees, and they should have no trouble finding new jobs. Just down the street from Cisco's Silicon Valley headquarters, they can go knocking on the doors of Juniper Networks (Nasdaq: JNPR  ) , Extreme Networks (Nasdaq: EXTR  ) , and the 3Com-based networking unit of Hewlett-Packard (NYSE: HPQ  ) . French rival Alcatel-Lucent (NYSE: ALU  ) is a wee flight away but sports several local offices around the valley. And expanding the job search to optical-networking specialists, you'll find Finisar (Nasdaq: FNSR  ) and Oclaro (Nasdaq: OCLR  ) even closer to Cisco's neck of the woods -- you could switch jobs and still have lunch in your old favorite hangout.

Granted, some of these rivals are going through their own firings and might not be keen to pick up Cisco's castoffs. Even so, this should lead to a significant shift in talent distribution and market shares. Networking used to be Cisco's private playground, but the market is now teeming with hungry competitors.

That’s exactly how the market is reading Cisco's final cuts; many of the rivals I mentioned have seen their shares rising more than 4% while Cisco itself is back where it started this morning.

Trimming the fat is a great start, but Cisco's problems run deeper than simple expense-bloat. To read up on what ails the company and then keep an eye on the turnaround effort, add Cisco to your Foolish watchlist. It's a great way to stay informed on the tickers that matter most.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Cisco and shorting Juniper. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


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  • Report this Comment On July 19, 2011, at 8:55 PM, JeanDavid wrote:

    It will make a huge difference to the employees that were cut, and to their faiilies. And all the merchants with whom they do business directly (grocery stores, cable TV companies, etc.) and to farmers, shoe makers, ... . It ripples through the whole economy.

  • Report this Comment On July 20, 2011, at 1:33 AM, loudcld wrote:

    The actual number is 13,700. The additional 1200 doesn't get talked about because they are "contingent workforce"; another words contractors.

  • Report this Comment On July 20, 2011, at 2:20 PM, corned wrote:

    I wonder if the reaction would be positive if Cisco disclosed the details of this massive off-shoring move?

  • Report this Comment On July 20, 2011, at 3:13 PM, IowaReino wrote:

    Geography aside, those companies won't be able to absorb that many employees. Could it possibly be a sign of a sale? Cisco's value is down and might make them easier to buy. I was part of a company that had a massive layoff and then sold 6 months later. I wonder if this could be similar?

  • Report this Comment On July 21, 2011, at 10:26 AM, loudcld wrote:

    There is no off-shoring going on. That happened many years back. Cisco is too big for a sale. Who can buy a $90B company. The only thing that is happening is John Chamber is finally getting shareholder friendly. Over 900 VP and higher folks got canned. There are still too many in my opinion. But it is getting better from shareholder point of view.

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