Is Cisco's Balance Sheet A Strategic Weapon?

Andrew Schmitt says recent borrowing by Cosco (CSCO) is not for acquisitions, but to serve as a lender of last resort to its distributors and customers.

Last week we noted Cisco's move to borrow $4 billion, despite its cash hoard of nearly $30 billion, and the widespread speculation that the fresh infusion might be connected with coming acquisitions. Andrew Schmitt of Nyquist Capital has a different take on Cisco's borrowing, and it's an interesting one.

"We believe Cisco is growing operating cash in order to serve as a lender of last resort to its distributors and customers," Andrew writes. "An expanded balance sheet will ensure adequate capital is available not just for its own operations, but also the operations of its channel partners and customers."

Cisco's financial statements show that the company has increased its financing commitments by 50 to 75 percent over the previous year, Schmitt reports, while total revenue grew only 5 percent in that period. "This is quantitative evidence that Cisco is stepping into the breach created by a collapse in the credit markets," he concludes.

Here's the interesting wrinkle: Schmitt predicts that Cisco's cash position offers a strategic advantage as it battles with HP and other tech giants in the market for enterprise data center equipment. If customers can't borrow elsewhere and require vendor financing,  the vendor with the greatest lending capability can gain an advantage. "In the fiscal environment of 2009-2010 this isn’t a technology fight," he writes. "It is a balance sheet fight. And Cisco can deploy billions more in working capital simply because HP is already significantly more leveraged than Cisco."

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