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Cisco Spends $1.2 Billion For Respect, Was It Worth It

This article is more than 10 years old.

In a recent article discussing the dull nature in which network giant Cisco is perceived to operate, I said that the company needed to do something to excite investors. Because although Cisco has beaten earnings estimates in seven consecutive quarters (and counting), the company is finding it progressively more difficult to earn the respect of Wall Street. However, this time, the company is looking to buy its way into the growth discussion after spending $1.2 billion in cash for Meraki, an acquisition that has left some investors thinking, “Oh no, not again.”

No matter how you choose to look at it $1.2 billion is a heck of a lot of money, even for a company such as Cisco that’s been sitting on almost $50 billion. That said, I believe there are synergistic opportunities here for Cisco and frankly, it had to do something to position itself for future growth. What investors want to know is where the value is. Said differently, what is Cisco really getting and did it have to spend so much for it.

For the past couple of year, Cisco has been working hard on its SDN strategy, also known as software-defined networking. While the concept is not new, it is an area that is yet to take off and prominent names such as Oracle, VMware and Brocade have each opened their wallets of late and buying smaller niche companies to help establish position in what is expected to be a highly competitive market.

Still, for a company such as Cisco, which is still working to overcome failed acquisitions of the past, it is hard to fault investors for feeling a bit nauseous after a $1.2 billion tab for a market that is yet to truly be defined. Still, I’m willing to give Cisco the benefit of the doubt here. For instance, even if Cisco does not realize any near-term benefit from this deal, still, solely on the basis of defense and if Cisco on sought to block another rival such as Juniper or F5 or even Hewlett-Packard from jumping in and closing this deal, Cisco still wins.

What’s more, as the SDN market start to emerge more fully, this only buys Cisco time to figure out its next move. As noted, with almost $50 billion in cash, it is hard to envision that more deals are not in the works. In the meantime Meraki will help Cisco compete more effectively in areas such as Wi-Fi equipment and cloud-based LAN solutions where a company such as Aruba Networks is considered the gold standard within the sector.

Bottom Line

As much as I think this acquisition is a good move for Cisco, I also appreciate the fact that it is going to take some time to work. Still, shares on the company looks incredibly cheap – even on the most conservative assumptions. Likewise, for investors wanting to know if the company overspent for Meraki, I think another important question to ask is, would it really have made a difference?

Not to make light of it, but the company’s growth has been uninspiring. And as noted, Cisco has been sitting on $50 billion in cash. In other words, doing this deal a lot better than the alternative – which would have been that the company sits on its hands.