Cisco's Meraki Acquisition Will Post Gains 'For Years To Come'

| About: Cisco Systems, (CSCO)

The corporate development department at Cisco (NASDAQ:CSCO) has been on spending spree in 2012. The company has made ten acquisitions this year, three of which came in November alone. The company's most seminal acquisition to date came on November 18, 2012, when it acquired Meraki, Inc., a leader in cloud computing for middle-market businesses and enterprises. The acquisition will allow Cisco to make cloud-managed networks available to its middle-market businesses and enterprises. For a company that zealously defends its market share position, known for purging its competition, this move may be its boldest, and wisest, yet.

For the past few years, Cisco has vigorously defended its dominant market share of the networking business; often times, however, the ascent of cloud computing has revolutionized the industry. This series of acquisitions in 2012 has been part of the company's strategy to reassert its dominance with Meraki being its shrewdest move yet. It has, however, raised the following question: what does the acquisition of Meraki mean for the company going forward? There are 3 takeaways, all of which are positive for the company.

First, the acquisition is good for Cisco's customers on two fronts. First, while Cisco has made valiant strides with the Cisco Connect Cloud/Smart Wi-Fi platform, Meraki's cloud management expertise in amalgamation with Cisco's hardware will be a significant improvement, and will be a formidable product in the marketplace. Meraki's services are focused on the growing number of underserved middle-market companies who are expanding rapidly. Second, the acquisition will enable the company to bridge the nexus between its network hardware and cloud technology. According to Meraki, mobile devices accounted for the majority of devices accessing networks for the first time in 2012.

Second, by bridging the gap between network hardware and cloud computing, Cisco has not only created value for its clients, but has created a new growth driver for itself. The company, which grew at a modest 6% when other companies were experiencing negative growth recently, has been trying to determine ways to capitalize on the cloud computing revolution. Based on projections, Meraki believes that with Cisco's global reach, revenues, which are currently around $20 million, will see a significant spike in the not-so-distant-future.

Third, the acquisition will enable Cisco to meet its goal of maintaining a dominant share of the market. The biggest loser from this deal is Aruba (NASDAQ:ARUN). Aruba's new cloud-based Wi-Fi solution, which was seen by the company as a key area for growth, will now become a parochial relic.

Cisco's most contentious rival, Juniper (NYSE:JNPR), will be a close second in the race for biggest loser because of this acquisition. The networking company, which has always been a nemesis in the market share battle, will also face serious challenges because of Meraki's cloud controller architecture. This architecture, which is far better than the "controller-based" architectures, can easily transfer into cloud based SDN controller in the future-creating even more problems for Aruba and Juniper.

Hewlett Packard (NYSE:HPQ) stands to lose as well. This acquisition is part of the larger SDN rivalry that has been going on between the two companies over the last year. Hewlett Packard, which has focused on cutting into Cisco's switching market share, finds themselves searching for a new solution to broaden its customer base quickly. The company, which acquired 3com to compete with Cisco in this business, will need to find other Wi-Fi vendors such as Meru or Ruckus to compete.

International Business Machine (NYSE:IBM) also stands to lose, however, not as severely as the aforementioned companies. IBM, while it has strategic alliances with Cisco, is partnered with Brocade (NASDAQ:BRCD) to provide Ethernet switching equipment that is no match to what Meraki and Cisco can provide. If Brocade is to compete in this area, they will need to be acquired quickly so they can not only expand their customer base but also have a team of engineers who can improve their network solutions.

Cisco's acquisition of Meraki was a smart move that will reap the company benefits for years as the cloud computing revolution determines the winners and losers for the next decade. While the stock price is still down from its year-to-date high in April, the company has positioned itself to continue to maintain, if not gain, market share in the networking business by taking advantage of cloud based technologies. The company is on a good path with the acquisitions it has made in 2012, with Meraki being its most seminal achievement to date.

The company set out in 2012 to make acquisitions a part of a larger plan to seek businesses with higher margins and lower costs, and to provide services and products that customers demand. Moreover, Cisco is focused on cloud-based companies that can address the broader networking shifts towards cloud. This vision has served the company well, and will do so going forward.

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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