Cisco picks off another cloud-networking asset

The company continues to solidify its portfolio of cloud-based networking offerings by offering to pay $1.2 billion in cash to acquire San Francisco-based Meraki.

By TheStreet Staff Nov 20, 2012 12:22PM

illustration of cloud data in the form of 1s and 0s © John Lund/Photographer's Choice/Getty ImagesBy James Rogers, TheStreet

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Cisco Systems (CSCO) gazed upon the cloud again this week and opened its wallet, offering $1.2 billion for privately held cloud networking specialist Meraki

The acquisition comes on the heels of Cisco's $125 million purchase of cloud automation and management specialist Cloupia.


With the market for Cisco's switches and routers near saturation, the networking giant is keen to nurture its growing cloud-services business. In its most-recent quarter, Cisco reported a 12% year-over-year gain in revenue from services, as revenue from sales of networking gear fell by 2%.  

Meraki touts technology for Wi-Fi, switching, security and mobile device management, which is managed from the cloud. With a growing number of businesses letting employees hook up their own smartphones and tablets to corporate networks (a phenomenon known as Bring Your Own Device, or BYOD), Cisco sees an opportunity to tap into this trend through the Meraki acquisition.


In addition to BYOD, Meraki supports guest networking, application control, WAN (wide-area network) optimization and application firewall services.


"The deal is consistent with Cisco's strategy to bolster its software and services offerings to drive greater recurring revenues at higher margins," Amitabh Passi, an analyst at UBS, wrote in a note. "We believe Cisco approached Meraki a few weeks ago with the offer looking to bolster its cloud networking portfolio, while Meraki will benefit from Cisco's global reach."


Passi maintained his "buy" rating and a $22 price target on Cisco.

Managing network traffic flows with software 

Funded by Sequoia Capital and Google (GOOG), Meraki was founded in 2006 by Massachusetts Institute of Technology grad students. The San Francisco company has since signed up more than 10,000 customers, including Burger King Worldwide (BKW), hotel giant Accor and DineEquity's (DINApplebees.

"In our view, this deal further enhances Cisco's Unified Access platform with an expanded lineup of cloud-based networking solutions," wrote analyst Brian White of Topeka Capital Markets. White has a "buy" rating on Cisco and a $23 price target on the stock.


Cisco's Unified Access platform aims to simplify IT operations by helping businesses manage both their physical and wireless networks.


The acquisition, however, was hardly a bolt out of the blue, according to Oppenheimer analyst Ittai Kidron. "The deal doesn't surprise us considering Cisco's ongoing effort to build-out WLAN and Unified Access in longer term defense of its Ethernet switching business," he wrote. 

"As for Meraki, its appeal lies in its software controller which allows network operators to centrally manage and operate networks through the cloud. While valuation appears rich, Meraki could round out Cisco's WLAN (Wireless LAN) portfolio and longer term, potentially complement its SDN (Software-Defined Networking) and cloud strategy."

SDN refers to, a set of techniques for managing network traffic flows through software, which is increasingly touted by the likes of Cisco and networking rival Hewlett-Packard (HPQ). 


At 6 p.m. ET today, TheStreet will host a Trade Credt Insurance webinar with Todd Lynady, senior underwriter for Zurich in North America and Mike DeLuca, senior partner of One Source. Register at TheStreet.

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