Get the latest tech news How to check Is Temu legit? How to delete trackers
TECH
John Chambers

Chambers' tenure was a tale of two eras

John Shinal
Special for USA TODAY
John Chambers, Chairman of the Board and CEO of Cisco.

SAN FRANCISCO — For technology investors, John Chambers' two-decade tenure as Cisco Systems CEO was a tale of two eras.

The first, from 1995 to 2000, provided millions of ordinary shareholders with extraordinary returns and turned both the company and its leader into household names.

The second, however, saw Cisco shares (CSCO) badly lag the broader market for tech shares and become a disappointment in many retail investors' growth portfolios.

The irony is Cisco under Chambers became a vastly more profitable company after 2000 than before, as measured by net income, operating income and all the cash flow metrics that count.

Yet since the bursting of the dot-com and telecom bubbles at the turn of the century, the company's share price has never reached even half its all-time high.

A big reason why — Chambers' use of stock-option grants to pay for acquisitions and incentivize employees — is worth noting by those piling into the high-priced growth stocks of today.

When a public company gives to executives, employees and other insiders a huge chunk of the equity value it either has created or will create in advance, there's not a lot left for ordinary shareholders.

Granted, Chambers wasn't alone in doling out options, which have been and remain a large chunk of compensation for many skilled tech workers. But few companies had as many stories of office administrators-turned-millionaires as Cisco did.

And for years in the 1990s, it used stock-based acquisitions as a primary growth driver.

Using its highflying shares as currency, Cisco under Chambers gobbled up dozens of early rivals to become the No. 1 maker of Internet gear.

The company's success in integrating acquisitions led Chambers to once boldly predict Cisco could keep growing its top line between 30% and 50% annually.

Throughout the 1990s, the so-called New Economy powered by Cisco and other tech firms helped propel the broader U.S. economy into a nearly decade-long prosperity boom.

Chambers became a quarterly fixture on CNBC and an informal adviser to U.S. presidents.

Yet, as every longtime Cisco shareholder knows, Chambers' growth strategy had one serious weakness. Funding acquisitions and compensation packages with shares and options, rather than cash, works well only as long as the price of the underlying stock keeps going up.

Once Cisco's share price began to waver and fall, the effect of all those stock grants on its per-share profitability became magnified.

At the same time, after five years of a global telecom investment boom, most of the businesses and governments that wanted Internet switches and routers had already bought them. With its sales and bottom-line growth both under pressure, the stock fell from territory it would never recover.

Cisco's time as the darling of tech growth investors was over.

Still undaunted, Chambers would revamp the company's operations several times over the next 15 years, using Cisco's own research spending, rather than deal-making, as the primary driver of growth.

A long list of former networking rivals, such as 3Com, Lucent, Nortel, Bay Networks and Ascend Communications, are now gone and forgotten by investors. Cisco, meanwhile, is still consistently profitable and enjoys steady, albeit single-digit, top-line growth.

Thanks to its financial performance and dividends, it's a widely held stock still favored by income investors.

While not a founder such as Microsoft's Bill Gates, Apple's Steve Jobs or Oracle's Larry Ellison, Chambers' long tenure and achievements put him in the rare company of those who helped shape the modern tech industry.

Looking back, those who personally benefited from Chambers' stock-based growth strategy would likely call it generous. On the other hand, growth investors who bought or held the shares hoping for a stock-price turnaround might call it reckless and unsustainable.

What's not debatable is that John Chambers, as Cisco's longtime CEO, built the company to last.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.


Featured Weekly Ad