Why It’s A Good Idea To Invest In Small Cap Tech Companies

| December 24, 2012 | 0 Comments

Cisco Systems (CSCO)It can be very good news for small companies if big companies have money to spend.  Cash-rich companies are using their resources to gobble up smaller players with good technologies and ideas.

And that can pay off big time for small cap shareholders.

It’s particularly true in this environment of high profile IPO flops.  It’s becoming a far safer pay day for companies to be acquired rather than chance an IPO.

Plus, it works out well for big companies looking to quickly buy into promising technology or new lines of business.

To see a perfect example of this, look at what Cisco Systems (CSCO) has been doing this year.

Of course CSCO is known as a powerhouse in the networking equipment industry.  Think Cisco, and most people picture a fancy blue router with the “Cisco Systems” logo on it.

However, routers, switches, and other networking equipment have become quite commoditized.  And CSCO’s margins have been shrinking as a result.  In fact, the company is even looking to sell off its well known retail brand, Linksys.

Here’s the deal…

The company’s management team has wisely realized it won’t remain a powerhouse unless their business model changes dramatically.  That’s why CSCO is reinventing itself as a software and services company.

In fact, Cisco has made ten acquisitions of smaller companies this year.  Many of those were software companies, particularly those focused on cloud computing.

It makes sense after all, you can’t have a cloud without a network.  It’s a natural transition to go from making networking equipment to actually servicing the network.

But let’s get back to the acquisitions…

The most recent one was of a startup called Meraki, a leader in cloud computing.  CSCO paid $1.2 billion for the company – not an insignificant sum.  (That’s what having lots of cash can do for you.)

Meraki is a small company, employing only 330 people.  If it had gone public, it would have almost certainly qualified as a small cap.  Keep in mind, many of the best technological ideas come from small companies.

In many cases, big companies don’t create the next generation of technology… instead they buy it.  And, as I’ve said many times before, that’s why it’s never a bad idea to invest a portion of your funds in exciting, small tech companies.

Yours in profit,

Gordon Lewis

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Category: Investing in Penny Stocks, Technology Stocks

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