Why the Cisco Announcement May Scare the Hell Out of You

From a Forbes’ blog:

Here’s why Cisco Systems’ bad financial news last week should (maybe) scare the hell out of you.

First, in case you missed it, here are the details of the announcement. On Thursday, Cisco stunned both the tech world and the stock market when it cut its sales forecast for the second quarter in a row. Worse, chairman and CEO John Chambers said that the company’s current situation is the result of outside forces beyond the company’s control – in particular, declining orders from cable companies and government agencies.

The market responded quickly and strongly to such depressing news from one of the linchpins of the U.S. economy: the Dow fell nearly 74 points, or 0.7 percent to close at 11,283.10. It could have been a lot worse – at one point in the day trading was down as much as 126 points.

We now know, as John himself has subsequently admitted, that he had returned from the holiday break to discover that Cisco’s enormous backlog of orders had essentially. . .evaporated. In the course of a single day, Chambers had gone from believing Cisco was atop the business world to fearing that the company might already be doomed. Looking back, it was the moment that the dot.com bubble began to pop.

Needless to say, Cisco survived and went on to even greater success – not least because Chambers ran the company in such a way that he would never again be surprised as he had that day in early 2001. Indeed, one can even make a pretty strong case that Chambers is today one of the world’s best CEOs.

And that’s what made Cisco’s announcement last week so troubling. After all, IBM and Motorola had already announced that were optimistic about further growth in sales to government in the fourth quarter. Were they deluding themselves and their shareholders? Or was something wrong at Cisco?

We still don’t know the answer. But it seems to me that are three possible scenarios, none of them good. Let’s look at them from least scary to most terrifying.

1. Cisco’s got problems – Over the last few years, Cisco has undergone a major organizational transformation from what can best be described as a traditional, monolithic $30+ billion corporation into a radically knew ‘matrix’ organization of more than thirty largely independent operating units empowered with their own profit/loss responsibilities. Chambers admitted at the time that this was a risky move, with little precedent. So, perhaps the challenges of decentralization and coordination are proving more difficult that Chambers and his executive staff ever imagined. After all, it wouldn’t take more than a couple incompetent unit executives to damage the company’s bottom line. This is bad news for Cisco shareholders if those business units have to be fixed – and really bad news if the Cisco organizational model is a failure . . .especially as Cisco is facing a lot of big and small competitors these days. But it means little to the larger economy.

2. The other guys are wrong – This is a whole lot more scary. Chambers really is one of the best business leaders alive, he’s got a decade more experience since the crash of 2001, and, approaching retirement, he is very focused on his legacy. It’s hard to believe he got caught flat-footed – by the economy, by surging competitors or by an organizational breakdown. So, if he says the problems are external and beyond Cisco’s control, a betting man should probably believe him. But if you do, what that means is that: a) IBM, Motorola and others are flat-out deluding themselves – which may explain the commensurate drop in Big Blue’s stock on Cisco’s announcement; and b) What little momentum the U.S. economic recovery had is now fading away . . .and we face the prospect, at best, of sitting dead in the water for yet another year.

3. Chamber’s ghost is back – This is the one that should really scare the hell out of you. The simple fact is that John Chambers has not had to make an announcement like the one he did last week since that day in 2001. He didn’t look as frightened this time – but then, he’s already been through it once, and he’s had nine years to become a better actor. If the hidden message of this new announcement is the same as the hidden message of that historic announcement, then we are looling at the prospect of a double-dip crash . . .and given the state we are already in, with massive debt and high unemployment, the prospects for the U.S. – and world – are almost unthinkable.

I’d say that’s three good reasons why we should pay a whole lot more attention to what’s going on at Cisco Systems right now, and not treat it as More of the Same. Right now, John Chambers is sitting on information that may decide the near-term fate of the economy. We should stick around and listen.

http://blogs.forbes.com/mikemalone/2010/11/15/the-cisco-in-the-coal-mine/