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Has Cisco Gone Bonkers?

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"Beware Greeks bearing gifts," goes one old saw. Today, let's bring that into the 21st Century, and apply it to the world of investing.

Beware companies bearing too much cash
The tech world was set abuzz last week when BusinessWeek voiced rumors that Cisco (Nasdaq: CSCO  ) may move even deeper into the consumer electronics market.

Fools may recall that Cisco first began branching out of its business customer focus in earnest with a pair of acquisitions earlier in the millennium -- buying first Linksys back in 2003, then set-top cable box maker Scientific-Atlanta in 2006. After each of these moves, Cisco then sat quietly, digesting its prize, for more than a year. But in recent months, as Cisco's cash coffers swelled to bustin', we've seen a corresponding burst of mergers and acquisitions activity at the tech powerhouse.

In January, Cisco announced the introduction of a new "wireless home audience system." Hardly a month went by before Cisco announced its next target: mini-camcorder maker Pure Digital Technologies. Now, fast-forward a couple of weeks, and we see Cisco filing patents that suggest its next move will be the introduction of its very own smartphone. According to Business Week, Cisco has applied for patents on tech relevant to PDAs, wireless delivery of video, and -- most tellingly -- a "network-connected phone" capable of streaming video

Which to my Foolish eye, all adds up to "Cisco wants to build a smartphone." The move, assuming Cisco follows through -- which I hope it doesn't -- follows in the footsteps of other tech giants making bumbling forays into the space. It's been reported since January that Dell (Nasdaq: DELL  ) has plans to take on Research In Motion (Nasdaq: RIMM  ) and Palm (Nasdaq: PALM  ) in the smartphone space. Hewlett-Packard (NYSE: HPQ  ) made its own big push just three months earlier.

Say it ain't so, Cisco
While refusing to confirm or deny the rumors, Ken Wirt, Cisco's VP of consumer marketing, loftily opined: "There are a lot of things people thought we wouldn't do that we can do." The real question, however, isn't "would" or "could," but what should Cisco do?

Consider: Right now, Cisco dominates the Internet equipment space. Its $40 billion in annual revenues dwarfs hard-hit smaller rival Alcatel-Lucent (NYSE: ALU  ) . Likewise, lesser networking competitors Nortel and Ciena (Nasdaq: CIEN  ) are also losing money while Cisco boasts a beefy 23% operating margin on its business. Simply put, Cisco's unstoppable on its own turf.

Foolish takeaway
For Cisco to leave its comfort zone and put billions of dollars of shareholder capital on the line, attacking established businesses like Apple, Nokia, and Palm -- each of which earns less on its sales than Cisco already does -- seems insane. It's diworsification incarnate, and should never happen.

Want a preview of how this could play out for Cisco investors? Examine what's happened to those who went before:

Fool contributor Rich Smith does not own shares of any company named above. Dell is a Motley Fool Inside Value selection. The Motley Fool has a disclosure policy.

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  • Report this Comment On April 07, 2009, at 1:31 PM, atpeace wrote:

    Not to disagree with the point that Cisco is doing more of a consumer push, but Scientific Atlanta was about a lot more than set top boxes. It allowed Cisco to penetrate a lot deeper with cablecos on IP infrastructure and be a one stop shop. Linksys also allowed Cisco to compete in the SMB space with price points they weren't willing to go to on their traditional ethernet switch lines.

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Rich Smith

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.

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