Why Credit Suisse Lowered Acquisition Budget Estimate for Cisco

Credit Suisse lowers its acquisition budget estimate for Cisco

On May 17, Credit Suisse analyst Sami Badri lowered his M&A (merger and acquisition) budget estimate for Cisco (CSCO), according to TheStreet. Badri now expects the company to spend $10 billion over the next two years, rather than $15 billion. Badri’s research note was released after Cisco’s fiscal Q3 2018 earnings announcement on May 16, where it posted unexpected debt payments.

In the third fiscal quarter, Cisco repatriated $67 billion in overseas cash reserves. Of the total cash reserves, ~$6 billion and $5.3 billion were used to repay short-term and long-term debt, respectively. It also paid a $1.5 billion tax charge. In the past five years, Cisco has more than doubled its debt usage. In 2013, it had ~$13 billion in debt on its books, which increased to ~$35.9 billion in fiscal Q3 2018.
Why Credit Suisse Lowered Acquisition Budget Estimate for Cisco

Cisco’s acquisitions are inclined towards software and rapidly growing technologies

As the above S&P and MarketWatch presentation shows, Cisco is among the top 20 technology companies based on cash reserves. Apple (AAPL) tops the list, and Microsoft (MSFT), Alphabet ( GOOG), and Oracle (ORCL) were also in the top five. Even with its repatriated cash reserves, Cisco might prefer to use this cash to pay down its debt rather than spending on new acquisitions.

Cisco has made more than 15 acquisitions in the past two years and 38 in the past five years. Badri highlighted that ~80% of the company’s acquisitions in the last four years have focused on software. Its recent acquisition of Accompany aimed to establish leadership in the collaboration and AI spaces.