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By Jon Bernstein, 15 May 2000 00:25

COMMENT Anyone who followed the fortunes of Cisco Systems last week will have seen an apparent contradiction between performance and reward. Third quarter results released midweek beat Wall Street estimates, showing earnings up a healthy half a billion dollars and revenues up a more-than-healthy 55 per cent. The Street's response? It wiped five points off the share price. This, remember, is the company that recently overtook Microsoft as the world's most valuable firm, owns over 75 per cent of the global market for network products, and leads a group of Internet enablers that includes the likes of Sun Microsystems and Oracle. Illogical? Maybe, but there were a number of reasons proffered. One is that the company is paying for a general 'correction' to the valuation of technology stocks. Another was a warning from its CEO, John Chambers, of upcoming component shortages. Most damning of all was an assessment from Dow Jones' financial weekly, Barron's. Its 8 May issue claimed Cisco is built on a 'house of cards'. The Barron's article argues Cisco's renowned acquisition strategy is driving up the price of all small telecommunications-equipment companies, many beyond their true worth. And as the price goes up, so the pressure for Cisco to buy right goes up - it needs to get it wrong just once for the rot to set in. But the market shouldn't forget Cisco remains the healthiest of the big-hitting technology firms. First, history shows Cisco does know who to buy, when to buy them and, crucially, how to integrate them. It has, after all, bought more than 30 companies since 1993, while mergers such as the one between Synoptics and Wellfleet forming Bay Networks went awry. Second, Cisco is at the right place at the right time technologically. Its equipment makes the Web possible: what Intel was to the PC, Cisco has become to the Internet. And like Intel, it is unlikely to get embroiled in any of the religious wars that plague the software part of the equation. Chambers reckons his main threat will come from innovative Silicon Valley start-ups rather than from the likes of Lucent or Nortel. That's why Cisco, not Microsoft, is the new bellweather of the high-tech sector. And despite last week's contradictions the future remains bright for Chambers and company.