Cisco's Dilemma: 6,500 Layoffs Might Not Be Enough (CSCO)

Cisco Systems Inc. (NASDAQ: CSCO) seems as though it cannot win for losing.  The company’s updated “action plan” involves a further organizational simplification, implying lower costs and layoffs.  The company aims to trim $1 billion from its annual operating budget and it is going to lay off about 6,500 workers as a result.  About 2,100 of those will be ‘voluntary early retirement’ plans, whatever that  is.  The plan calls for eliminating about 15% of vice president and above employees.  That comes to a 9% total workforce reduction.  There is more to this story than meets the eye.

Employees in the U.S., Canada, and elsewhere will be notified in the first week in August.  Cisco said that this will come to a charge on GAAP earnings that is up to $1.3 billion as a result.  Of that amount, some $750 million will be in the company’s fiscal fourth quarter and the balance of the charges will come throughout its fiscal 2012 year.

Cisco also confessed that it will incur other restructuring charges which “will be disclosed in earnings conference calls and in SEC filings.”  Cisco did say that it was going transfer over a factory in Juarez, Mexico to Foxconn in a deal which would close by October.  The company is selling the video and telecom equipment factory to Foxconn and this is a 5,000 person facility that it received when it acquired Scientific Atlanta in 2006.  While it says that it assumed the 5,000-person facility, the company did not outline the full details of its number of workers there.

Where this layoff gets sad is that the reports that first came out went from around 5,000 workers to 10,000 workers before the week ended.  Shares closed at $15.44 after a 1% drop and the stock is trading only at $15.45 in the after-hours session.  It is a sad day when technology employees get laid off and then it is not enough to keep investors happy.

If this turnaround does not work then John Chambers is going to need to announce sometime in calendar 2012 that he is adding one more early retirement in with the restructuring plan.  That would be his own retirement as CEO, even if he tries to maintain the Chairman title.

Could you imagine going back to the 1990s and telling investors that Cisco would be a dead stock for a decade and then that it was going to have to scale down its empire with layoffs after spending about 20 years buying entity after entity?  There is a lesson to be learned: nothing lasts forever in stocks and public company.  Literally, nothing.

JON C. OGG