Cisco’s Double Whammy: 1,300 Job Cuts and a Disruptive $1.3B Deal

Photograph by Paul Sakuma/AP Photo

There was a time when Cisco could consistently be counted on to post double-digit growth. Those days may be over.

Cisco Systems was dealt a double whammy in less than an hour yesterday.

First, the computer-networking giant announced plans to cut 1,300 jobs, as the European debt crisis and sluggish corporate spending threaten sales. That was at 3:15 p.m. New York time. Then, about 45 minutes later, VMware said it was spending $1.26 billion to buy Nicira, acquiring technology that lets businesses obtain networking features without buying expensive hardware.

For a company that’s lost almost half its value in the past five years, these developments are troubling. There was a time when Cisco could consistently be counted on to post double-digit growth. Those days may be over. Analysts are expecting a 6.4 percent increase this fiscal year from the San Jose, California-based company, following growth of 7.9 percent in 2011. Cisco responded to the sluggishness by eliminating 2 percent of its workforce, the latest step in its effort to trim $1 billion in annual costs and bolster profit growth.

But, VMware’s purchase of Nicira underscores what may be an even bigger problem — companies may simply not need as much Cisco gear. Nicira is a pioneer of what’s called software-defined networking, letting clients access the equipment that routes Internet and data traffic without actually paying for the big switches and routers. Just as VMware’s technology allows companies to manage their servers from remote computers, saving time and money, Nicira does the same for networking equipment.

Not that Cisco doesn’t see the same trend. Earlier this year, it invested $100 million in Insieme, a startup in Nicira’s market, and also introduced a competitive controller software product. Cisco’s first software-based networking virtualization product came out in 2009 and has 6,000 customers, said David McCulloch, a company spokesman. (Cisco also owns 5.1 percent of VMware’s outstanding stock.)

Still, Cisco generates more than $20 billion in annual revenue from switches and routers, and making up for a slowdown in the market it dominates is never easy for a technology company.

As an independent startup founded in 2007, Nicira posed little threat to the incumbent. Getting meetings with chief investment officers was challenging enough for the lean company, but getting them to actually change their buying habits in favor of an unproven technology was almost futile. Under VMware’s control, that equation flips. VMware has almost $4 billion in annual revenue, 11,000 employees worldwide and a stock market value of more than $38 billion.

“Being backed by VMware lends a much bigger feeling of safety to the story,” said Ben Horowitz, a partner at Andreessen Horowitz and a Nicira board member. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

“As a customer, you can know they’re going to make it work over a long period of time and be around,” he said.

And just like that, Cisco’s already weakened competitive position got more precarious.

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