Cisco, Dell Try To Buy Their Way Out Of Trouble

| About: Cisco Systems, (CSCO)

Not that there is anything wrong with this, but Cisco (NASDAQ:CSCO) and Dell (NASDAQ:DELL) have both decided that the way out of their financial spiral down is to buy start-ups.

Dell has been doing this for almost two years, under John Swainson, a former Computer Associates executive with a good reputation for having an eye for talent. The latest purchase is Gale Technologies, which produces software for what is called the "private cloud."

This is how the cloud market is evolving. First, companies experiment with the public cloud. Then they build a private cloud and move workflows to it. Then they create a "hybrid" cloud, combining resources on the public cloud with what they've built internally. The idea is that they can control the resources they feel they must control, use the easily-scalable resources of the public cloud, and get the best of both worlds.

We're very early in this evolution. Dell believes that OpenStack, originally sponsored by Texas rival Rackspace, will be the key enabling technology, allowing compatibility between public and private clouds. But they're willing to be wrong. Gale's GaleForce uses templates to do quick provisioning for cloud networking, storage and compute resources, across many vendors. It will become part of Dell's Active System Manager.

Cisco is approaching the same problem from its heritage as a networking company. Its latest purchase is Meraki Systems, which does campus WiFi systems for hotels, office buildings, hospitals, and campuses of all kinds. The company paid $1.2 billion, cash, for a company whose current sales run rate is just $100 million, and it will take more money to get that rate up to a goal of $1 billion.

And this is the risk inherent in both these deals, for investors. Big companies are paying big bucks for start-ups, and there remains a question of whether they can incorporate those ideas, and turn them into sales, before the people behind the start-ups go off and create another valuable start-up. It's a form of legal blackmail, in a way - you have to keep paying for the future you can't build yourself.

But it can have a positive impact, at least on the stock price. Here you've got two companies with tiny multiples - as low as 6 in the case of Dell, 11 in the case of Cisco - who are acquiring leading edge technology that they know has fast-growing markets.

Everything now depends on execution.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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