Cisco to remain active buyer as technology sector continues to transform, exec says
* M&A is vehicle for growth, not consolidation
* To ‘move decisively’ in wake of Dell-EMC deal
* Cloudera, FireEye, Fortscale, Nutanix among potential targets
Cisco Systems (NASDAQ:CSCO) will remain an active acquirer in 2016 with an eye on security, big data, cloud, data centers and Internet of Things (IoT), said Rob Salvagno, head of corporate development.
The San Jose, California-based company projects it will maintain a similar acquisition pace as last year, when it agreed to buy 11 businesses – nine of which were software companies, three with security offerings and eight with solutions that enable customers to transition into hybrid cloud, said Salvagno.
Addressing the hybrid-cloud opportunity remains an overarching motivator for Cisco, he said, and will lead to areas within the data center where the company has core assets -- like networking and unified computing system platforms -- and extend to the public cloud and the software assets that enable it.
Cisco will train its sights mostly on companies valued anywhere between USD 10m and around USD 200m, he said. Those targets typically have between 10 and 200 employees.
While most of its acquisition strategy will be to obtain talent and technology, there is a strong probability that Cisco could execute “a platform deal” valued between USD 1bn to USD 3bn, Salvagno said. Cisco historically has made one such purchase each year, he said, citing its USD 2.7bn purchase of cyber security firm Sourcefire in 2013 and cloud-based network company Meraki for USD 1.2bn in 2012.
But do not expect the networking equipment juggernaut to make any buys much bigger than those.
“We continue to believe that mega acquisitions don’t work," Salvagno said. "We think they have a low probability for success and we don’t see them as part of our strategy going forward.”
Blockbuster deals ‘a distraction’
One banner headline Cisco took notice of is Dell’s proposal to buy EMC (NYSE:EMC) for USD 67bn. EMC, a longtime partner of Cisco, is expected to help transform Dell into a full-fledged technology company.
The deal, which is on track to close in 1H16, gives Cisco the ability to “move decisively” around other market opportunities, Salvagno said. The Dell-EMC merger could become a distraction that prevents those companies from aggressively pursuing talent and technology targets that interest Cisco, he added.
Cisco prefers to partner with technology heavyweights rather than try to buy them, Salvagno said. That strategy was on full display in the second half of 2015 when Cisco partnered with Apple (NASDAQ:AAPL) and then Ericsson (NASDAQ:ERIC) to collaborate on the creation of products, services and sales.
While partnerships will continue to serve as a key pillar of Cisco’s innovation strategy, Salvagno said the company also will invest in emerging technologies and survey the global landscape for small- and medium-sized targets that can accelerate the migration of information technology to the cloud.
The current down market could create buying opportunities in the private market, said a venture capitalist familiar with Cisco. Hyper-converged infrastructure player Nutanix could become a target, he said. Nutanix filed paperwork in late December to lay the groundwork for an initial public offering, but the company has seemingly halted those plans as it waits for the volatile public markets to settle.
Public companies could come into play
M&A can indeed become a more viable exit for private companies when the public markets no longer look attractive, Salvagno said. Conversely, public companies that feel they are undervalued could become more receptive to a strategic player like Cisco coming in and offering a better price, he said.
While Cisco has made moves in recent years to diversify beyond its hardware, it still has yet to figure out if it wants to be a subscription software company, according to the venture capitalist. If the firm really wanted to make a big splash in the market, it could look at buying a big data company like Cloudera, he said. Although Cloudera is valued at around USD 5bn, Cisco is one of the few strategic players that could afford such a move. Also, since many large enterprises still run their big data and analytics on premise, Cloudera could help Cisco continue to sell its expensive hardware, he said.
Big data and analytics are emerging businesses and top priorities within Cisco, said Salvagno, noting that Cisco has invested in four companies in that space over the last few years, including Cloudera and MapR. Cisco sees big data as a primary use case for its multibillion-dollar unified computing system business, he said. Big data is a market undergoing a lot of change and it will continue to shape the future of the different markets that Cisco participates in across the technology spectrum, Salvagno added.
Security, meanwhile, is representative of a market where the pace of change is moving much faster than any other area of technology, he said. With the number of threats so diverse and constantly evolving, Salvagno said Cisco will supplement its partnerships and internal build out of security offerings with M&A.
Security information management (SIM) and analytics security are both areas of interest, he noted.
Privately backed Fortscale could be a viable target on the security analytics front, while Exabeam and E8 Security could interest Cisco on the SIM side, the venture capitalist said. A company like Denver-based ProtectWise might interest Cisco for networking security, he said. Cisco also could look at a public company like FireEye (NASDAQ: FEYE), which has lost more than 70% from its 52-week high of USD 55.33 in June, the VC said. The deal would represent a good value — FireEye’s market cap sits at USD 2.30bn — and help Cisco in its efforts to disrupt Palo Alto Networks (NYSE: PANW), he said.
A broad innovation strategy
Cisco’s broad innovation strategy includes a USD 2bn portfolio containing 100 private investments, Salvagno said. The company makes investments in early stage companies that give it a lens into emerging technologies and important regions. As disruptive technology businesses begin to mature and the markets they are in become attractive, Cisco grows more interested in bidding for them, he said. Rather than viewing itself as a consolidator, Cisco looks at M&A as a vehicle for growth, Salvagno said.
Salvagno, who has been with the company for 16 years, oversees 45 people around the world. About two-thirds of them are in Northern California and the rest are in China, Europe, India, Israel and, more recently, Australia, where there has been an uptick in innovation, according to Salvagno.
The corporate development team has the ability to execute all types of transactions, whether it is a USD 1m investment, a multi-billion-dollar acquisition or a cross-border joint venture, Salvagno said. Cisco does engage with investment bankers on a select basis, primarily for third-party valuations, he said.
Since its founding in 1984, Cisco has made more than 180 acquisitions.