Cisco (Nasdaq: CSCO) Buying its Cloud Presence

by David Eller

Investors in Cisco (Nasdaq: CSCO) have endured quite a rollercoaster over the past year.

But the company continues making solid moves. It recently announced the acquisition of Cariden networks for $141 million in cash along with employee retention incentives. While a small acquisition for the company won’t make a noticeable contribution to EPS, this is a typical smart Cisco acquisition. It’s the third of the month and an important step for Cisco’s march into cloud computing.

Full-service enterprise technology companies have been increasingly acquiring small, but proven, technology companies. This comes at the same time they’re cutting back on research and development. Why is this? The same reason that the Lion King is playing on Broadway instead of the next Death of a Salesman... Nobody is willing to take big risks on new ideas.

Why build when you can buy? Cisco is taking the intellectual property from these small companies and adding it to their existing product line. While this is new equipment to offer clients, Cisco’s monstrous sales force can shorten the sales cycle and compress the growth curve to squeeze out profits that would take the smaller company years to do on its own.

If Cisco used its capital to develop a new product internally, it would be taking on the role of a venture capitalist where the best investors have a one in 10 rate of success. By buying a company with an established product and a small customer base it pays more, maybe three times more than it would cost to develop – but it’s a guaranteed success.

Cariden's product line is geared toward “Optical Networks,” which will bulk up Cisco's “Service Provider Networking” group. This is outside of Cisco’s core competency in corporate networking. But the key to this acquisition might be that a new Cariden initiative into network analytics fits easily into Cisco's product line. While analytics aren’t unique to Cariden, the ability to read networking gear from such a wide variety of vendors in this new sector is a clear competitive advantage. As cloud networking continues to grow as a fragmented market, interacting with multiple vendors’ gear will be important for Cisco and the combined company.

We’ve seen Cisco use its balance sheet in the August quarter to buy a penny of earnings in order to meet analysts’ consensus EPS. Here the company is buying product to add to its portfolio. While we miss the go-go investing days of the 1990s, for longer-term investors, safe moves such as these may be right for our times.

Good Investing,

David Eller

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