Cisco
Systems, Inc.
Cisco: Overview
Cisco Systems, Inc. is an IT firm specializing
in the selling of networking and communications
products and services. A B2B company, Cisco's
products and services are designed for corporations,
public institutions, telecommunication companies,
commercial business and a small segment provides
for the individuals. The products and services
aim to transport data, voice and video communication
within buildings and campuses as well as around
the globe. The firm is spread out to four geographical
regions the Americas, Europe, Middle East and
Africa, Asia Pacific and Japan. The services include
routing, switching, home networking internet protocol
telephony, optical networking, security, storage
area networking, wireless technology, access,
network management software and service. Two major
acquisitions in the year 2004 include Latitude
Communications, Inc. in January 2004 and Andiamo
Systems, Inc. in February 2004.
From the financial perspective, Cisco shares are
considered to be a strong buy as it demonstrate
revenue rising to $5.97 billion for the 13 weeks
ended October 2004. Net income increased by 29%
while revenue reflects the increase in product
and services sales. Improved operating margins
are reflected in the higher income percentage
(Yahoo! Finance 2004).
Statement
Competitive strategies affect performance of firms.
The outcome of strategic plans not only influences
the development of the firm but also its investors.
Investors are fickle entities who greatly rely
on external information to gauge the firm's performances.
They are always in wait of the "news"
that affects their stocks. For this reason firms
that alter or change their strategies not only
get affected in its operations but also in its
share performance. The basic premise is that information
flow has a great impact on the stock of the company
(Chen 2002). This many include managerial decisions,
competition, or national and international market
conditions and economic performance. The objective
of this paper is to investigate the relationship
between information and stock prices for Cisco
Systems, Inc.
In the first section the researcher would provide
a brief summary of the stock price performance
from September 13 to November 19. This is followed
by an analysis of the news and identifies how
it relates with the stock price performance. This
is followed by a conclusion.
Analysis of data
Cisco's stock prices in the past three months
have demonstrated irregular ups and downs. On
September 13, the share closed at $20.25 to be
followed by a slight rise in the price to $20.35.
However, as the firm opened on September 15 there
has been a sudden dip to $19.56 and so the trend
continues with dips on September 27, October 4,
October 8 and October 13 and November 10. The
duration for the low prices lasts only about a
week or two before they jump to their normal rate
of $20. In the last three months this trend has
been observed to be extremely volatile as the
prices has only decreased never reaching back
to the $20s seen during early September. This
inconsistent trend in share prices could perhaps
be explained by the environment and the "news"
surrounding the company.
To begin with Cisco had been among the top performers
in its industry. Compared with the S&P 500
index (See Appendix 1) Cisco has outperformed
its industrial counterparts early in September.
This trend would have continued had Cisco not
announced its intention to diversify business
to enter into voice over Internet space (VoIP)
through the acquisition of NetSolve whose value
is approximately $128.4 ("Cisco Systems Dipping
Toes" September 14) and Dynamicsoft a company
valuing up to $51.2 million in acquisition (Levine,
September 13). The strategy had been to expand
Cisco's products and services to telecommunication
by expanding the scope of VoIP for small and medium
size business as well as explore integrated service
routers business in network ("Cisco Systems
Introduces New Portfolio" September 14).
But due to the nature of the acquired firm and
the financial strategy of diversifying the $55
million to include $3.8 million in debt and working
capital, investors are not keen on Cisco's future.
This has been reflected in a decline in the share
price on September 15 from 20.35 to 19.56 (Yahoo!
Finance 2004).
Similar effects have also been observed by the
researcher during the week September 21 to 27.
Share prices fell from 19.65 to 18.96 between
September 21 and 22 and fell even further on September
27 to 18.04. One of the factors being that new
regulations have been announced WEF by the year
end. The announcement comprise of the deduction
of option cost from share earnings for IT companies.
The employees as well as other shareholders according
to legislation have to expend the option cost
which would take effect from the year end. For
many venture capitalists and employees depending
on the shares income finds this announcement against
their liking as it would demoralize the concept
of performance incentives. Companies realizing
this kind of reaction from the investors have
tried to revise the regulation by appealing to
the FASB to revise valuation options for employees
without avail (Beck September 20).
Another reason why Cisco lagged in its stock
performance includes the news that a 20 year old
in England had been arrested for stealing Cisco's
software blueprint of networking equipment. The
insecurity stemming from this piece of news and
the previous ones mirrored investors' reaction
in the stock market as Cisco's share dipped significantly.
The sluggish share performance continued till
October 4 when the prices increased 18.93 to 18.96.
A look at the news trend indicate that the very
fact that VoIP did not appeal to the investors
earlier in September have projected a positive
future with the announcement of European users
interested in VoIP. According to the news item
by Tom Sanders on October 6 for example indicate
that Linksys a company specializing in VoIP have
started work with telecommunication operators
to provide VoIP services to home users in Europe.
System having earlier acquired Dynamicsoft and
NetSolve thus has a future in this industry. These
investors consider as a positive progress and
strategic decision taken by the firm which they
hope would materialize in higher income in the
near future. The position of the shares improved
significantly over the next few days as it increased
to 19.10 on October 5 and then continued to develop
to October 7 at 19.13.
By the end of October Cisco's share had seen
another turbulent slump. On October 28 NASDAQ
announced third quarter losses on overall trading
volume drops 10.9 percent ("NASDAQ Has 3Q
Loss as Trading Slumps" October 28). The
announcement basically outlines the electronic
stock market position how it has incurred $5.5
million loss for the three quarters compared to
total revenue of $124 million. Major shares such
as Microsoft Corp., Google Inc. and Cisco Systems
Inc. all have demonstrated low performances which
have resulted in the loss as compared to the previous
year. This announcement reflected in the share
price on October 18 which is 18.95.
The share price rejuvenates on November 12 when
the previous day November 11 Cisco announced it
had contracted to develop premium business network
and backbone for China's Telecom's IP Next Generation
network. This announcement generated a slight
change in the share price from 18.44 to 19.26
on November 12 ("Cisco Selected to Build
Backbone" November 11). With this announcement
analysts like Laurie J. Flynn (November 11) of
the New York Times has been of the opinion that
Cisco would challenge the adverse conditions in
the industry and to advance technologies geographically
as well as technologically. Even though Cisco
demonstrates a net income of $1.4 billion and
increase over last year's, investors still panicked
with the idea that the technology industry is
not performing well. The after effect of this
announcement had been that the speculators have
held on to their "buy" stocks to gauge
the ongoing events within the industry.
Nearing the end of November, Cisco's share demonstrates
a gradual but slow growth. This reflected the
general perception of the industry's performance.
As Gary Rivlin (November 18) announced that Silicon
Valley is performing sluggishly due to the superficial
rise in performance by companies like Intel, Google
and Genentech. For this reason, executives of
different companies including Cisco are gearing
for a rise in the performance of their companies
so as to increase the investor's confidence. Their
efforts have not had positive effect on the investor's
psychology as Cisco share's dipped slightly on
November 19 to 19.01.
Conclusions
From the above discussion it is clear that investors
and speculators in the shares market rely greatly
on the news about particular portfolio. They are
keen on forming opinion based on the news that
surround the industry as well as about the particular
companies. In this case it had been Cisco Systems
Inc. which is a technology company, an industry
that is sensitive to the environment as well as
the factors surrounding the company. Issues like
new mergers and acquisitions, economic conditions,
new entrants, news of new markets, performance
of rivals and the overall industry as well as
the opportunities that exist for the firm all
contribute to the investors' appeal to buy the
stock. Cisco in the past three months has demonstrated
volatile share prices due to these reasons. Thus
it has been established from the discussion and
analysis that news of new trend, markets and opportunities
influence buying behaviors of investors
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