Cisco revs up for another mega market

With close to $40 billion in annual sales, Cisco (Nasdaq: CSCO) really has no choice but to focus on multi-billion dollar market opportunities. And, according to a recent piece in the NYTimes, it looks like the next target is the massive server market (about $50 billion or so).

It's a worthy goal. Plus, Cisco has the credibility and distribution muscle to get critical mass.

But that's only a piece of the puzzle. After all, Cisco relies heavily on an ecosystem of partnerships. So, by moving into the server market, there's a risk of destabilizing things, especially with Hewlett-Packard (NYSE: HPQ), Dell (Nasdaq: DELL) and I.B.M. (NYSE: IBM).

However, to keep things growing, Cisco needs to get a chunk of the server market. And the good news is that the market is undergoing a distruptive change: virtualization. Essentially, this is sophisticated technology that increases the productivity of servers. It's a powerful value proposition for cash-strapped customers.

Moreover, Cisco can put together a compelling offering; that is, by bundling networking software and tools.

It's certainly a serious threat and it's a good bet that HP, Dell and IBM will respond. In fact, one idea is to buy up networking operators – which will likely spur a new round of consolidation in the tech space.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.