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Summary:

Cisco, an incredibly active acquirer, is ready to start doing deals again, according to John Chambers. We think it should be focusing on the cloud and beefing up its core networking skills by buying some of the companies we list in our story.

chambers

Cisco, an incredibly active acquirer, is ready to start doing deals again, according to CEO John Chambers on the networking company’s financial results call on Wednesday afternoon. Chambers said, “We expect to be more active with acquisitions,” and the company will focus on its five core areas of focus.

Those five areas are switching and routing, the data center, collaboration, video, and architectures for business transformation. In the past year Cisco has done six acquisitions, with half of those occurring in the past three quarters while it was handling its restructuring. As we have documented, Cisco’s previous forays into M&A have helped the company spread its bets on emerging technology around, but they haven’t always helped it boost its bottom line. Cisco also had seemed to lose focus in previous years, letting other firms come into its market and take share.

Based on the financial results at the end of Cisco’s fiscal second quarter of 2012, the company has $46.7 billion available in cash and cash equivalents. It is profitable and is generating cash as well after completing its reorganization, which has cut $1 billion off its annual run rate. In response to questions about M&A strategy on the call, Chambers said that the acquisition strategy remains the same, buying companies with about 100 engineers and products close to coming to market that Cisco customers tell the company it should buy. He pointed to the acquisitions of Tandberg and Starent as good examples of deals and said that of all the large players out there making acquisitions only Oracle had a similar success rate as Cisco when it came to integrating deals.

If Cisco is back in the shopping mood, we have a few suggestions for places where it should start. It should go all-in on the cloud, which seems like where Cisco wants to focus anyhow.

Since software-defined networks and OpenFlow are clearly an emerging area in the networking space, Cisco should shell out money for a player in this space. Big Switch would be a good bet, as it is trying to create an ecosystem using open-source controllers and then focusing on building services and applications on top of that platform. The model is different for Cisco, but the focus on enterprise applications and services is one that would benefit Cisco and lead to higher margins.

As clouds are deployed, monitoring and tracking websites and application performance from within the network are important for Cisco and its enterprise clients, which is why New Relic could also be a good pick for the company. New Relic’s SaaS-based software monitors performance and tracks issues back to the data center to help enterprises or website owners pinpoint bottlenecks and problems.

If Cisco wants to go big, my colleague Derrick Harris suggests that NetApp might be a good buy, because it reduces Cisco’s reliance on EMC, a relationship that is rumored to be on the rocks. If it is not NetApp, any storage vendor with a strong virtualization story and promise in the enterprise would help bolster Cisco’s burgeoning server division as well as its storage networking lineup.

Given the array of startups bringing both intelligence and performance improvements to different areas of the network, there are plenty of opportunities for Cisco to pick up new customers, technology and market share by buying a startup or established company. Who do you think Cisco should snap up?

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  1. I agree that an acquisition in the storage space would be a nice compliment to UCS, but NetApp seems a bit large as a $15B company.

    I still like the combination though. NetApp is a solid company showing good continued growth and currently well of its highs. With NetApp, Cisco would be able to offer a top to bottom hardware solution for virtualization.

    Next stop, throw some weight behind an OSS hypervisor and save everyone from spending more on VMWare than the blades to run it.

  2. > Since software-defined networks and OpenFlow are clearly an emerging area in the networking space, Cisco should shell out money for a player in this space.

    You mentioned Big Switch but did not mention Nicira which has raised raised $50 million

    Nicira
    @nicira Palo Alto, CA, USA
    It’s time to virtualize the network.
    http://www.nicira.com

    But the impact of SDNs on the network hardware industry, of which Cisco is the dominant vendor, will not be felt for another couple of years, Mullaney says. Eventually, network intelligence will be sucked out of the hardware and housed in controllers at the edge of the network, acting as the brains of a “cheap” Layer 3 IP switching fabric, he says.

    Cisco is preparing for the emergence of OpenFlow and SDNs. The company has stated plans to add OpenFlow to its Nexus switches, but beyond that, its plans for either embracing or combatting the SDN trend are unclear.

    However I think Cisco needs do better than just next gen layer 3 and 4 IaaS with smart bets in intelligent cloud networking ( layers 5 – 7 ) for PaaS 2.0 and SaaS.

    1. By that logic maybe Cisco should by Embrane? As for Nicira, its open Flow agnostic, while Big Switch seems intent on building a business around its platform using Open Flow. Picking up Big Switch gets Cisco the OpenFlow cred and it doesn’t need to get much else. It could also could put somewhat of a damper on the ecosystem if Flood Light proves popular.

      1. I think it will be neither. Cisco has been generally incapable of selling software. Buying Nicira or Embrane would not fit their current model. Buying just for the street cred will not only be a waste of money, but will create negative impact internally. Also, adding OpenFlow interface will not help NXOS/5K because it basically shifts the value of the NXOS to the controllers — not a good model when you upsell on countless features. SDN should be in cards for Cisco, in the future, but not in the way most define it today.

  3. Hi Stacey,

    Cisco’s Vice President of Mergers and Acquisitions recently joined Comcast Cable as Senior Vice President of Strategy and Finance:

    http://www.linkedin.com/in/indersinghciscosystems

    Furthermore, Cisco’s net realizable cash is actually lower than it was 10-years ago while having $16 billion more in debt:

    http://www.bradreese.com/images/cisco-capital-structure-fy11.jpg

    Finally, Cisco’s historical financial statements confirm -$809 million discrepancy in security sales:

    According to Cisco’s historical financial statements, Q2’FY12 security sales were actually down -6.96% year-over-year, not up +24% as shown in its new statements.

    Where did the -$809 million discrepancy go?

    Note: Cisco did not respond to my repeated requests for clarification, nor did Cisco clarify the -$809 million discrepancy in its Q2’FY12 earnings call nor its Q1’FY12 earnings call.

    http://www.bradreese.com/blog/2-8-2012.htm

    Sincerely,

    Brad Reese

  4. Stacey,

    I’m inclined to think that Cisco will buy technology as opposed to an established player. I think an interesting play would be Linerate…

    http://lineratesystems.com/

    Rich

  5. Cisco already OEM’s gear from Wyse, that seems like low hanging fruit to pick up and expand virtual desktop offerings immensely? I like the NetApp call as well…

  6. With all of Cisco’s FlexPod innovation, another interesting play would be a hosted data center monitoring tool such as LogicMonitor that provides visibility across Cisco, VMware, and NetApp from one console.

  7. Cisco could be looking at Dragon Wave who is in the process of acquiring significant worldwide assets from Siemens. Dragon Wave engineers also already have a working relationship with Cisco. It’s a combination that would continue Cisco’s out performance of its competition with overseas market expansion in mobile as well as cloud services.

    Also, Dragon Wave fits very well into the model size of M&A for which Cisco excels.

  8. Having acquired Lightwire to enhance Cisco’s capabilities in high-performance networking hardware, it’s time for Cisco to find the right light engine to power hi-speed optical interconnects. Innolume (www.innolume.com) could be an interesting target here.

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