Cisco revs its acquisition engine

Network equipment giant is gobbling up companies again, pledging to spend more than $6 billion in October alone. That's a good sign that the economy is in recovery.

Network equipment giant Cisco Systems is feeling good enough about the economy to rev up its acquisition engine, pledging to spend more than $6 billion in a single month on smaller companies.

Cisco on Tuesday announced its third acquisition this month and its sixth acquisition so far this year. The company said it plans to buy Web-based security software company ScanSafe for about $183 million in cash.

Two weeks ago the company announced plans to buy wireless equipment maker Starent Networks for $2.9 billion . And at the beginning of the month, it said it would buy Norwegian video conference equipment maker Tandberg for $3 billion

After a brief acquisition hiatus the past year during the economic downturn, Cisco is back in the merger and acquisition saddle. In all of 2008, Cisco bought five companies, all well below the $1 billion price tag. In 2007, it bought a total of 11 companies, including the $2.9 billion purchase of WebEx.

Cisco's 2009 buys
Vibol Peou/CNET

Cisco's eagerness to get out its checkbook again, indicates two things. First it shows that Cisco, which had about $35 billion in cash as of the end of July, is confident enough in the stability and recovery of the economy that it can make some big purchases. And second, it's a good sign that Cisco is seeing some good deals, as the economic downturn has likely depressed the value of many potential acquisition targets.

"Cisco has a lot of cash," said Zeus Kerravala, a senior vice president at Yankee Group. "And it's definitely a buyers' market out there today. If you look at the timing and the amount of money it's spending, I think you can definitely say the company is feeling better about spending that cash now than they were earlier this year or even last year."

Tech bellwether
Cisco, which makes equipment that powers the Internet and most corporate networks around the world, is seen as a bellwether in the tech industry. Because the company's products are used by almost every large company, government entity, broadband and telephone service provider, and thousands of small and medium businesses around the globe, the company has a strong pulse on the economy and technology spending in general.

The company's CEO John Chambers is viewed as somewhat of a technology oracle. And investors listen carefully to what he says and the tone of his comments for hints at what to expect from other companies in the technology sector. Cisco was one of the first companies, well over a year ago, to see the economic downturn coming. The company had noted a slowdown in spending from some of its biggest corporate customers in the U.S. and Canada.

And during the company's most recent quarterly earnings conference call in August , Chambers said he was optimistic that the economy, at least in the U.S., was starting to improve.

"We saw a number of positive signs in the economy and in our business over the fourth quarter," Chambers said during the call in August. "It's still early, but if we continue to see these positive trends in one or two more quarters, there's a good chance we say the tipping point occurred in the fourth quarter."

Specifically, Chambers said he saw orders for new products reverting back to normal trends in the company's fourth fiscal quarter. And he said he was starting to see sequential growth again.

It would appear that the positive trends that Chambers saw in the fourth quarter are continuing in the first quarter, as Cisco now feels confident enough to make some big purchases.

This is important because during the company's 25-year history, Cisco has traditionally grown its business through acquisition. During the dot-com and telecom boom times, Cisco was one of the biggest acquirers in the technology industry. In 1999, it spent roughly $14 billion on 18 companies, including nearly $7 billion on optical networking start-up Cerent. In 2000, it spent about $12.5 billion on 28 deals.

After the bubble burst, the company's M&A activity was relatively light until 2005, when it bought Scientific Atlanta for $6.59 billion. In 2005, Cisco spent a total of about $7.7 billion, the most money it had spent in one year on acquisitions. With two months left in 2009, Cisco is getting close to breaking that record this year.

As the company attempts to get into new markets like video conferencing, data center, wireless, and consumer products, it is acquiring companies that meet its strategic needs. Chambers has repeatedly talked about the importance of investing during a downturn to position the company growth when the economy returns.

Cornering new markets
ScanSafe is a cloud-based software service that allows customers to license applications on demand. The company said ScanSafe's technology will help Cisco expand on capabilities it added when it bought IronPort in 2007. Cisco also plans to integrate ScanSafe's service with its AnyConnect VPN client to provide a secure mobility solution. And Cisco will use ScanSafe's data centers to provide new cloud security services.

The ScanSafe acquisition is small compared to the other two big acquisitions this month, but Kerravala said it's still very important from a strategic standpoint.

"This acquisition is more aligned with what Cisco is doing in the cloud and in the data center," he said. "The biggest barrier to cloud computing and services is security. So this fits in nicely with Cisco's cloud, data center, and borderless enterprise initiatives."

But the hefty price tags that the company is paying for larger more established companies, such as Starent and Tandberg, suggest Cisco is also looking for a kick-start to jump into new markets like video conferencing and the data center. This is especially important as it goes head-to-head with large competitors, such as Hewlett-Packard and IBM . These deals not only help Cisco compete more aggressively, they help it deliver the growth and performance that Wall Street expects from the company.

That said, Cisco probably wouldn't have considered these big acquisitions if it didn't feel like the economy was returning to normal.

"In a down market, I doubt they'd look for these big deals," Kerravala said. "Now with things coming back, it looks like Chambers thinks the timing is right. When you are being asked by Wall Street to grow 10 to 15 percent each quarter and you're as big as Cisco is now, you have to make big deals to sustain that kind of growth."

 

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