What’s Wrong with Making a little Purchase? – CSCO
If you track the stock market, then you probably know that almost every shift in price is mostly decided by perception. One common understanding is when a rumor of an acquisition occurs. Once people find out that company A is going to purchase company B and suddenly company B’s stock soars, while company A’s usually gets hurt a bit. I have no problem with the rising price in company B (especially if I own it), but sometimes I find it strange that a company’s price should go down if they make a purchase.
What brings all this to my attention right now is Cisco (CSCO). I have held this stock for a couple months now, and have rode a good ride. They report solid numbers and have a firm position in their area; however, just a couple days ago it announced that is was going to by the privately held company Navini for $330 million. As reported on Forbes.com, Cisco said that
Navini’s technology will help it build high-speed Internet networks deep in emerging markets where traditional Internet infrastructure doesn’t exist or is spotty.
Obviously such an experienced and influential company wouldn’t buy something they didn’t think would better them off. Moreover, this purchase will help them break into an untapped market where there is no competition, but there is one reason I could think of that might scare some people of a purchase. They might feel spending tons of money will hurt the earnings at the end of the quarter, but with such a big company does that really matter? According to Forbes
The acquisition will cost San Jose-based Cisco $330 million in cash and assumed options, but that won’t make much of a dent in Cisco’s cash hoard, which stood at $22.3 billion at the end of the last fiscal year.
I am sure there is some textbook answer to my question, but I personally don’t see what is so bad about spending money to better a company. If anything, I think both Company A’s and B’s stock should rise. What do you think?
I would also recommend buying CSCO on this stretch of a pullback or increase your position.
Free Analysis. Get a free trend analysis for any market... any stock... any time.
