--Deal targets small- and medium-sized businesses
--Executive says margins better-than-average
--Some analysts consider deal expensive
By Drew FitzGerald
Cisco Systems Inc.'s (CSCO) new $1.2 billion acquisition stakes
more of its future on a wireless market segment that could prove
more profitable than its traditional business supplying large
corporations, analysts and executives said.
The network gear maker on Sunday said its acquisition of Meraki
Inc., pending regulatory approval, would give it access to a new
array of small to medium-sized businesses not yet served by its
current wireless networking business, which sells Wi-Fi gear and
controllers large customers often have to manage themselves.
San Francisco-based Meraki instead lets customers wire stores
and offices with Wi-Fi equipment and manage them through Meraki's
own cloud-based software platform. Many of its customers, such as
Accor SA (AC.FR) and Burger King Worldwide Inc. (BKW), aren't very
small, but they're more willing than other companies to manage
Wi-Fi networks on someone else's system to save on IT overhead.
"They'll prefer a cloud," Janney Capital Markets analyst Bill
Choi said. "You need both, because your customer base is not
one-size-fits-all."
Cisco's acquisition also expands its business closer to the edge
of the world's networks, overshadowing its core business selling
routers and switches that form the Internet's backbone. The San
Jose, Calif., company has long sold such gear at profitable gross
margins above 60%, but the business has shown signs of slowing of
late.
Cisco last week said it generated less fiscal first-quarter
revenue from switching and routing businesses than a year earlier,
while its wireless networking business, which mostly serves big
companies, grew 38%.
Rob Salvagno, senior director of business development at Cisco,
said Meraki's business will add to Cisco's average gross
margins.
"M&A continues to be one of the foundations for how Cisco
innovates," he said. "I don't see that changing."
Shares were up 1.1% after $18.19 Monday after the company
detailed its acquisition, benefiting from a broad market rally.
Aruba Networks Inc. (ARUN), which started its own off-premises
wireless networking offering to compete with Meraki's, slid 1.2% to
$18.61.
Cisco Chief Executive John Chambers last week said the company
would pursue deals that provide immediate revenue in addition to
acquisitions in the software sector, bringing Cisco closer to its
goal of doubling the share of revenue it makes from software in
five years.
Meraki now sees bookings of about $100 million a year, meaning
Cisco values its customers and technology at about 12 times
bookings.
"This seems a bit rich, but may be appropriate considering the
company's strong growth rate," said Shelby Seyrafi, an analyst at
FBN Securities.
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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