--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 firstname.lastname@example.org
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