Cisco Systems, Inc. Probably Won’t Split: Goldman

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Investors have apparently been wondering if Cisco Systems, Inc. (NASDAQ:CSCO) will be the next major technology company to split up. After all, eBay Inc (NASDAQ:EBAY), Hewlett-Packard Company (NYSE:HPQ), Symantec Corporation (NASDAQ:SYMC), Motorola Solutions Inc (NYSE:MSI) and JDS Uniphase Corp (NASDAQ:JDSU) recently announced that they are splitting. Also there’s been pressure on EMC Corporation (NYSE:EMC) to split as well.

However, Goldman Sachs analysts believe that Cisco Systems won’t split. In their report dated Oct. 10, 2014, they offered some other suggestions that they believe would make more sense for the company, saying that investors have been asking about whether Cisco will split.

Why Cisco Systems shouldn’t split

Analysts Simona Jankowski, Kent Schofield, Balaji Krishnamurthy and Doug Clark said they see three big strategic obstacles to Cisco splitting. First, they note that approximately 80% of the company’s business is through its distribution / system integrator channel. Cisco has 68,000 channel partners, and they think those partnerships are among the company’s most valuable assets. If the company splits, then it would use a lot of its channel power.

Second, they say the breadth of the company’s offerings means it is able to “sell solutions and combat point-product commoditization,” which they say gives it an advantage over competitors.

And third, they say Cisco Systems’ switches and routers are the most important part of its Intercloud strategy. Because of those products, the company’s partners are able to compete with, Inc. (NASDAQ:AMZN) and other public cloud providers. They don’t believe that a strategy of going directly to customers is viable right now because of commoditization, scale and the amount of time it takes to get products to market.

Cisco Systems should optimize its portfolio

Instead of splitting up, the Goldman Sachs team said it would make more sense for Cisco to optimize its product portfolio. They said the company might sell off its legacy hardware businesses and then build or buy a leading software-based next-gen solution in those markets.

They estimate that this strategy may hit Cisco’s 2015 sales by 7% and its earnings per share by 4%, but they believe it might raise the company’s earnings per share growth profile from 6% to 8%. That could drive an expansion in Cisco’s multiple. Currently the company trades at a price to earnings multiple of 11 times, and they suggest the multiple could expand to 13 times.

That increase would imply a price of $29 per share, which is their current target price for Cisco Systems. They rate the company as a Buy.

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