Cisco And The Ubiquisys Acquisition

| About: Cisco Systems, (CSCO)

Last Monday Cisco Systems (NASDAQ: CSCO) announced its intention to acquire UK-based small-cell vendor Ubiquisys for $310 million in cash and some other incentives. We analyze the acquisition and conclude that the effects on the firm's revenue will be positive in the middle run. Furthermore, the acquisition will add diversification to the business portfolio of Cisco, by increasing software revenue, and provide new business opportunities for the networking giant.

First of all, the acquisition of Ubiquisys confirms the strong interest in small cell technology and self-optimizing network architecture (SON), essential new technologies that would allow carriers to get more capacity out of existing airwaves.

Small cell technology consists of tiny cellular base stations that offload mobile data traffic onto a wired backhaul service. Ubyquisys is the leader in the field: it was ranked number 1 by ABI Research for enterprise and residential cells, outperforming Alcatel-Lucent and Huawei.

SON, on the other hand, is a technology that enables mobile carriers to plan, configure, manage, optimize and heal cellular networks automatically.

Now, let us look back at some of the recently announced acquisitions by Cisco:

- December 2012, BroadHop: A policy control and service management for carrier networks worldwide. Denver based.

- January 2013, Intucell: Basically provides advanced SON. Israel based.

- January, 2013, Cognitive Security: Carries out research in network security. Location: Czech Republic.

- March 2013, SolveDirect: Provides innovative, cloud-delivered services management integration software and services. Location: Austria.

Therefore, It becomes evident from the timing and the target of these acquisitions that:

1) Cisco has a strong, global and urgent interest in mobile carriers.
2) Cisco is acquiring both hardware and software technologies, in an attempt to provide an integrated new small cell solution to mobile carriers as soon as possible.
3) Most of the recent acquisitions are based outside of the U.S., evidencing a tax efficient strategy in acquisitions.
4) Acquisitions are not large enough to lower the estimated fair value of Cisco. They are components of a strategic middle term plan to strengthen the business portfolio for mobile carriers.

The acquisition of Ubiquisys is particularly promising because not only could it help Cisco strengthen its relationship with global mobile carriers, it could also bring some important sales in the short run since Ubiquisys itself has managed to achieve some impressive sales. For example, Japanese giant Softbank is deploying Ubiquisys small-cell technology inside its equipment in Japan.

Due to the mentioned reasons, we see the acquisition of Ubiquisys as favorable and consistent with the middle and long term objectives of the firm. The best possible owner for a company like Ubiquisys at this moment is, indeed, Cisco.

View: Optimistic.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over 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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