INSIGHT-Succession questions swirl around Cisco's Chambers

Tue Sep 13, 2011 12:30am EDT

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* CEO has board support, faces internal tensions-sources

* Wants to leave on high note-sources

* Cisco analyst conference starts at 8 am PDT Tuesday

By Nadia Damouni and Nicola Leske

Sept 13 (Reuters) - When John Chambers takes to the stage on Tuesday, many will be wondering if it is the last time the chief executive leads Cisco Systems Inc's (CSCO.O) annual financial analyst conference.

After more than 16 years at the helm of the world's largest network equipment maker, there is discussion both inside and outside Cisco that it is a matter of when -- and not if -- Chambers will cede the CEO job.

While Chambers, 62, still enjoys the support of the board and there is no formal CEO search under way, there is frustration in the company over the lack of a clear succession plan, according to people with knowledge of the situation.

Potential candidates have begun to lobby Cisco shareholders to build support, amid a general belief that the next leader will likely come from outside the company following the exodus of many senior executives in recent years.

The roster of possible CEO contenders being bandied about Silicon Valley include former Hewlett-Packard Co (HPQ.N) chief executive Mark Hurd and former Cisco executives Charles Giancarlo, Mike Volpi, Gary Daichendt and James Richardson.

Other industry executives who have also been mentioned as possible contenders for what would be one of technology's most high-profile jobs include Juniper Networks Inc (JNPR.N) CEO Kevin Johnson, former McAfee CEO Dave DeWalt, and HP executive David Donatelli.

"The internal people at Cisco are having a massive war right now about potential succession," said a source close to the company. "There is real tension about succession. Everybody knows it's coming now."

As for Chambers himself, he wants to end his tenure on a high note, which means he will not likely be stepping down until the company's quarterly results are on firmer ground, said the source and another person close to the situation.

The first source said Chambers was looking for at least one strong quarter before he goes.

In February, Chambers spooked investors for the third time in as many quarters with a weak outlook, stoking concerns that the company had stretched itself too thin by making several large acquisitions in the consumer market.

Amid fears that Cisco has lost focus on its core business of making switchers and routers that direct Internet traffic, the company also faced intense competition from smaller rivals such as Juniper, Check Point Software Technologies (CHKP.O), F5 Networks Inc (FFIV.O) and Riverbed Technology Inc (RVBD.O).

In May, Cisco announced a corporate-wide reorganization after losing a number of top managerial talent, with Chambers admitting that the company has lost its way. In July, Cisco said it would cut 15 percent of its workforce, or 11,500 jobs.

CEO'S WINGS CLIPPED

In the run up to Tuesday's analyst day, there is some renewed optimism on Wall Street that Cisco has moved past its worst quarters. Several analysts have upgraded their earnings estimates, with some noting that the customer franchise remains solid and complimented management's speed at restructuring.

Cisco's last set of quarterly results in August showed some stabilization of the business, though questions remained over long-term growth. [ID:nN1E7790WE]

The stock has recovered a little since the results, though it is still down some 40 percent from a May 2010 high.

As Cisco has focused on cost cutting and on its core business, it is one of the few tech giants that has stayed out of -- and some would say missed out on -- the multibillion dollar mergers and acquisitions game this year.

"John's wings have been clipped, mostly by the public market, not so much by the board," said a former Cisco executive.

Still, the search for a successor would depend on Chambers' willingness to step down. People who know him said Chambers would likely be more willing to relinquish the CEO reins if he could become chairman of the board, but that could put off potential successors who want autonomy.

"John very much likes being CEO of Cisco and it is not only what he has been doing for almost two decades, but I think it is the foundation of his political persona which I don't think he wants to give up," the former Cisco employee said.

Over the last few years Cisco has lost a number of key executives, including several who had been viewed as potential successors to Chambers.

Mike Volpi, who was in charge of service providers and routing, left in February 2007, followed by Charles Giancarlo, who was chief development officer. The following year, Jayshree Ullal, head of data center, switching and services, left.

In 2010, Cisco received another blow when high-profile executive Tony Bates was appointed the new CEO of Skype.

While Cisco's executive bench still includes respected officials, such as Chief Strategy Officer Ned Hooper, the view from some people who follow the company is that the next CEO is more likely to come from outside.

"There doesn't appear to be anyone within Cisco who is positioned to take over," said a veteran tech banker.

A CONTROVERSIAL CHOICE: HURD

Cisco has a succession plan but it has not been publicly disclosed, said two people familiar with the company.

Meanwhile, Cisco's 12-member board have remained loyal to Chambers and his strategy. There is no "executive management move and search" underway, one of the people said.

As long as Chambers has the support of the board, it is difficult to predict when he might step down, but potential CEO candidates are trying to position themselves for a move in the next 12 to 18 months.

Several external candidates have reached out directly to some of Cisco's shareholders, a majority of which are top U.S. institutional investors, according to sources who spoke on condition of anonymity.

Mark Hurd is not one of the candidates lobbying for the support of Cisco's investors, but a source familiar with the situation said third parties have made preliminary efforts to gauge Hurd's interest in becoming Cisco's CEO.

Hurd was credited with reviving HP by slashing costs and diversifying the technology giant through a string of high-profile acquisitions. He could bring that same tenacity and operational excellence to Cisco, supporters say.

But others questioned whether Hurd had the strategic vision to lead Cisco on its next phase of growth, and noted that he already had a good job working for Larry Ellison at Oracle Corp ORCL.O. Hurd is paid more than $70 million a year as Oracle's co-president. Chambers earns about $17 million a year.

"Mark feels tremendous loyalty to Larry. He would have to get Larry's permission if he were to do something like that and I am not even sure if he would want to approach Larry with it," said a source close to Hurd.

Ellison hired Hurd last year after he quit HP following sexual harassment allegations made by a marketing contractor who worked for Hurd's office from 2007 through 2009.

Hurd has little interest in charting out an exit strategy from Oracle, but an opportunity to lead tech bellwether Cisco would be worth considering for any executive, even if Chambers would remain as chairman, industry insiders said.

Cisco declined comment. The executives named in this story either declined to comment or could not be reached for comment. (Reporting by Nadia Damouni in New York, Nicola Leske in Frankfurt and Poornima Gupta in San Francisco, editing by Tiffany Wu, Bernard Orr)

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