Acquiring smaller enterprises to strengthen a company's brand and value in the marketplace always comes with a certain amount of risk - regardless of how desirable a smaller company's products or employee talent seems at the time. Integrating another company's products and introducing employees to another company's business practices takes time and exceptional management skills. Depending on how employees adapt to working for a new company, the integration process can take much longer than anticipated. Another risk is alienating talented employees, which could cause some to look for other employment.
But if successful, the revenue potential of merging new products and talent from a smaller company into a larger one can be big. Personally, while I'm typically apprehensive whenever one company acquires another, in the end, the potential for increased profits and further product and service innovation usually outweigh these risks.
Cisco Systems (NASDAQ:CSCO) recently acquired ClearAccess, a small, private company known for its TR-069 standards-based software. Cisco plans to merge the software and ClearAccess employees with its Network Management Technology Group. TR-069 standards-based software, used by residential and mobile phone service providers to monitor performance and other metrics, helps these providers troubleshoot and fix technical issues while providing better customer service.
In addition to acquiring ClearAccess, Cisco may also acquire Truviso by the end of Q4 2012. Truviso, also privately owned, designs and manufactures software used for business data analysis and reporting. The software, which operates in real-time, provides those in both business and service-related industries up-to-date information about customer service, product performance in the marketplace, and operations data. Customers can use this data to make improvements to processes and customer relations.
Cisco plans to merge Truviso (software and employees) into its network management platform, Cisco Prime. The company hopes the acquisition will make Cisco Prime even more effective because the information provided will now be in real-time. For Cisco Prime customers, this is a huge benefit.
Benefits of Corporate Acquisitions
From an investment perspective, acquiring both companies can only make Cisco more valuable as both offer products that will enhance the services Cisco already provides. I think Cisco customers will really enjoy using these products and will hopefully tell other business owners about them to increase revenue.
Other benefits of acquisition include new pools of talent which could save the company money and time when it comes to developing innovative new products and services. If Cisco manages to retain most of the employees that currently work for ClearAccess and Truviso, the company may increase its pool of experts, which could really pay off later on when developing new products and services in-house. This reduces the need to spend time and money in finding and hiring new people.
And speaking of innovation, through acquisitions like these, Cisco can focus on other projects instead of spending time and money innovating platforms like Cisco Prime that already exist. While making an existing product even better helps maintain a company's competitive edge, product enhancement can be very expensive and take years to complete. But when acquiring complementary products and successfully merging these products, companies save time and money.
This approach has worked well for other companies. In 2010, Alcatel-Lucent (ALU) acquired two companies to expand its presence in the mobile apps marketplace. Instead of developing brand new products for mobile app creation and maintenance, Alcatel-Lucent integrated products from these companies and offered them to existing customers that had expressed a need.
Earlier this year, Juniper Networks (NYSE:JNPR) acquired Mykonos software, a company that develops security products for websites and other online applications. The company plans to use these products to expand its presence in the web securities market.
IBM (NYSE:IBM), known for acquiring small and large companies plans to continue its search for companies to purchase through 2015. Over the past few years, the company has spent over $14 billion and has acquired over 24 companies.
Risks of Corporate Acquisitions
Investors can't adequately determine whether to continue investing in a company until fully assessing all the potential risks of acquiring other companies. In addition integrating the acquired company's products, services, and employees, some companies face opposition directly from investors, which could lower the stock price and cause potential investors to rethink their investment decisions. In 2011, for example, Hewlett-Packard (NYSE:HPQ) announced its acquisition of Autonomy, a UK-based software firm. Investors, unhappy with the decision, pulled out from HP and the stock fell dramatically. Since investors can't always determine what other investors will do, there's always a certain amount of risk that cannot be resolved even after investigating the goods and services produced by the acquired company.
In the End
To succeed in a competitive market, companies must make decisions such as acquiring other companies carefully. Cisco should be able to continue building its brand without much trouble. Acquiring ClearAccess and Truviso will hopefully allow the company to provide both existing and new customers with the additional products and services desired.
For Alcatel-Lucent, Juniper Networks, and IBM buying out companies and integrating products and services into company portfolios seems to work well. It seems Cisco will continue to follow in their footsteps. When investing in companies that use corporate acquisitions as part of an overall product development strategy, my advice is to carefully review the portfolios of acquired companies to determine if the goods and services purchased have real value not only to the company buying out the acquired company, but also to consumers.
If, for example, one company acquires another company just to see how well it will perform in a new market, investors should think twice about investing because if the experiment fails, the company can sell off the assets it purchased, but investors are the ones who suffer in the meantime. But, if the company already has an established brand within a market and wants to expand its range of goods and services to existing customers, then the acquisition may be very profitable for both the company and its investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.