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On Monday morning, shareholders of Cisco Systems (CSCO) will get the opportunity to react to Sunday's takeover of Meraki. Cisco will acquire the privately-held cloud networking company for a consideration of $1.2 billion.

The Deal

Cisco announced on Sunday that it will acquire Meraki, a leader in the cloud networking business. The San Francisco based company offers easy-to-deploy on-premise solutions that are centrally managed from the cloud.

Meraki was recently founded in 2006 with funding from Sequoia Capital and Google (GOOG).

By acquiring Meraki, Cisco can offer more software-centric solutions to simplify their network management issues. The deal will boost Cisco's "Unified Access" platform which makes IT more responsive to business innovation by simplifying IT operations.

Besides offering access to cloud, Meraki furthermore offers Wi-Fi, switching, security and mobile access to the customers applications.

Rob Soderbery, Senior Vice President of the Cisco Enterprise Networking Group, commented on the deal, "The acquisition of Meraki enables Cisco to make simple, secure, cloud managed networks available to our global customer base of mid-sized businesses and enterprises. These companies have the same IT needs as larger organizations, but without the resources to integrate complex IT solutions. Meraki's solution was built from the ground up optimized for cloud, with tremendous scale, and is already in use by thousands of customers to manage hundreds of thousands of devices."

Cisco will pay approximately $1.2 billion in cash and retention-based incentives to acquire the company. The deal is expected to close in the second quarter of Cisco's fiscal 2013, depending upon customary closing conditions including regulatory approval.

A presentation of Meraki's website reveals that the company achieved a $100 million booking run rate in 2012. Furthermore the company generated a positive cash flow with its 330 employees. All three founders remain with the company working on their target of achieving $1 billion in revenues per year.

Cisco will hold a press conference on Monday to provide further details regarding the deal.

Valuation

Cisco reported a decent set of first quarter results last week. The company holds over $45.0 billion in cash, equivalent and short term investments, making the $1.2 billion deal easy to finance. Cisco holds $16.3 billion in short and long term debt, for a net cash position of $28.7 billion.

Cisco is valued at approximately $95.4 billion, which implies a valuation of operating assets at $66.7 billion. Based on Cisco's 2012 full year revenues of $46.1 billion and earnings of $8.0 billion, this values the firm at 1.4 times annual revenues and 8-9 times annual earnings.

Cisco recently raised its quarterly dividend by 75% to $0.14 per diluted share, for an annual dividend yield of 3.1%.

Investment Thesis

Year to date, shares of Cisco are trading roughly unchanged. Shares rose from $18 in January to low twenties in March. Shares fell back some 30% to $15 after the firm closed the $5 billion acquisition of NDS. Shares recovered and are currently exchanging hands at $18 per share.

Shares of Cisco have lost considerable ground in recent years, despite the solid operational performance. Shares are down roughly half from their highs of $33 over the past decade, set in 2007. Cisco grew its annual revenues some 28% between its fiscal 2009 and 2012, reaching $46.1 billion. Net income rose 31% to $8.0 billion, while earnings per share growth was higher as Cisco retired roughly 10% of its shares over the past four years.

A week ago I wrote that shares of Cisco are fairly valued despite concerns about Europe and the impact of competition from emerging competitors. Investors are worried that the company might "waste" its extensive cash balances on expensive acquisitions, following the deal with NDS.

Sunday's $1.2 billion deal is rather modest, and while the deal multiples are high based on $100 million bookings in 2012, it might bring comfort to investors. The medium sized deal might be reassuring to investors as it demonstrates that Cisco makes selective acquisitions, opposed to a major acquisition in order to boost its presence in the field.

I reiterate my stance. The valuation is appealing at 8 times earnings, excluding the cash position. The dividend yield is appealing as well, and sustainable given the strong cash flow generation and balance sheet.

Cisco is a perfect addition to any long term diversified portfolio.

Source: Cisco Announced The $1.2 Billion Cloud Acquisition Of Meraki