Cisco Snags Another 'Flawless' Acquisition

| About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) began 2012 with one mission for its corporate development department: help the company maintain its dominant market share position by seeking businesses to acquire. Cisco sought businesses with high margins, low costs and provide services and products that customers demand. The company uncovered these businesses in a variety of areas in 2012, and all of them have in some way capitalized on the cloud computing revolution.

An ideal example is Cisco's acquisition of Meraki, which I covered in "Cisco's Meraki Acquisition Will Post Gains 'For Years to Come'."

This is a strategy that has been, and will continue to be, very successful for Cisco. The primary reason for this success is that unlike most companies, Cisco has structured itself in a way that enables newly acquired companies to be seamlessly integrated. Moreover, the company's corporate development department, which is arguably the best in the world, typically acquires only companies that can integrate quickly - even if this means passing up on a great company that ostensibly offers tremendous synergies.

One of Cisco's primary means to achieve its broad goal of being a high margin, low cost and customer driven company has been through acquisitions. Given that the company has $45 billion in cash and equivalents on the balance sheet and innovation within a company its size is very difficult, this strategy is not only smart but also has proven to work. The company has made ten suppliers in 2012, three of which have occurred in November alone. Despite the difficultly such integrations can cause, the company has seen continued growth of 6%.

Cisco's most recent transaction, the acquisition of Cariden Technologies, Inc. for $141 million, is part of the company's strategy to capitalize on the recent breakout of software-defined network ("SDN") companies. Cariden, which is a supplier of network planning, design and traffic management solutions for telecommunications service providers, will help Cisco enhance its service provider software.

But will this acquisition work? And, just as important, how successful have SP networking acquisitions by hardware networking companies worked in the past? Just because Cisco has been successful in the past does not mean prosperity is a given.

However, I believe it will work because the company's corporate development department has focused on acquiring companies based on two factors. First, it has focused on helping Cisco maintain high margins, low cost, and consumer-focused products and services by acquiring companies in spaces such as SDN. Second, it has placed a higher emphasis on how well a company will be integrative into Cisco's business and culture as opposed to focusing on great companies that have tremendous projected operational and financial synergies.

Cisco's strategy, however, has its critics. The argument against Cisco's strategy is that the company cannot innovate within itself, and therefore has to acquire startup companies that have the ability to focus solely on their specialty. Moreover, it is argued that Cisco, a company which makes several acquisitions every year, has pursued an approach that is difficult to manage. Acquisitions, it is argued, very rarely help companies achieve the growth they are seeking because the synergies are not as strong as projected.

In Cisco's case, however, these arguments have been proven false time after time over the past five years. Over the past five years, the company's net sales have risen every year except 2009. Moreover, its net income has returned to above 2008 levels, which its primary competitor, Juniper Networks, Inc. (NYSE:JNPR), has failed to do yet. (See the linked material to view Juniper's financial data.)

Hewlett Packard (NYSE:HPQ) has also seen similar results of steady growth since 2008. Despite its crushing debt and dated products, HP ramped up its revenue by $10.7 billion - 14.5% - its weak performance in 2009. International Business Machine (NYSE:IBM), however, has been able to avoid these trends because of the diversity of its revenue stream. The company has maintained a steady annual growth of around $7 billion in revenues and $1 billion in net income. IBM has done an exceptional job of adding great products. For example, IBM is trying out new technology that would allow customers - who operate items like planes and trains - to know ahead of time when a part needs replaced. (GE is also working on this.)

This quarter alone Cisco has achieved a 6% growth rate while some of its competitors, who do not pursue such a vigorous acquisitions strategy, have achieved negative growth this quarter. For example, VMware (NYSE:VMW), who recently acquired Nicira for $1.26 billion, has seen a decrease in net income by 20%. This example is a classic case of two great companies who, even after performing due diligence, find it difficult to achieve synergies between their companies. Moreover, VMware is structured differently than Cisco. VMware's corporate structure and talent acquisition team are focused on innovating within the company and retaining talent. Cisco, on the other hand, has retained talent by acquiring companies based on integration, as opposed to recruiting, which is the typical approach.

Another networking company that has made an acquisition recently is Brocade (NASDAQ:BRCD), who offers network virtualization architecture for SDN, cloud computing and virtualized data centers. On November 5, 2012, Brocade acquired Vyatta, a software-based network operating system company. This bold move by the company is really an act of CEO desperation rather than a significant play. The company, which has struggled to turn consistent returns for investors, is looking to pursue a similar strategy as that of Cisco, however, is finding entrance into such areas as SDN difficult.

Cisco's acquisition of Cariden will help the company to continue to capitalize on the cloud computing revolution through its new focus on SDN. The company, which has achieved steady growth in revenue, will continue to be successful as long as it continues to make wise acquisitions, as it has done this year.

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.