Every Cloud Has A Silver Lining

Gargi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anticipation, usually bordering on skepticism, is the general sentiment dominating any merger or acquisition announcement. Such was the case for the recent acquisition announced by Cisco (NASDAQ: CSCO), in which it will be acquiring the growing cloud-computing company Meraki for a record $1.2 billion in cash and retention-based incentives.

Given the huge cash reserve of $50 billion that Cisco flaunts, such an investment may not directly impact the finances of the company. However, whether this decision was backed with sufficient foresight or not is a fact that only time can tell. Why such a merger? Some analysts are touting this merger as a “twin–win” for Cisco. Firstly, after being under the scanner for its lackluster way of running the business with limited growth, this acquisition, closely followed by the Cloupia acquisition, is being seen as a bold step to silence its critics. Secondly and more importantly, the main implication of this merger would be to consolidate Cisco’s position in the emerging world of SDN, also known as software-defined networking and cloud computing.

SDN basically refers to the decoupling of the software from the hardware. It eliminates the need of having to touch individual switches to direct data packets, a phenomenon which is essentially useful in cloud computing. Cloud computing, in simple terms, means allowing users to access software applications that are stored in remote data centers using the internet instead of installing them on individual machines. It’s known to increase efficiency, manageability, and user satisfaction of various applications, all while providing enough space to accommodate the innovative needs of the ever growing IT market.

The battle of the IT giants has always been extremely cutthroat, but the recent opening into the world of cloud computing and SDN has taken ferocity to a different level. Major companies have taken the plunge by acquiring smaller niche companies to take on the challenge and prime themselves for the inevitable transition. Software giant VMware (NYSE: VMW) acquired Nicira for $1.2 billion, sending a clear statement about the company’s future plans of paving its way into the private cloud, and consequently into the public cloud arena. Although presently companies like VMware and Microsoft (NASDAQ: MSFT) are focusing on marketing and selling their inclusive private cloud software offerings, they are also working on their alliance with Azure and vCloud partners to prepare themselves for the next big thing – “hybrid cloud.”

The R&D departments of both of these companies are supposedly researching on ways to ease transfer of virtual machines to either Azure IaaS or vCloud service to take on the giants such as Amazon and Google and have an edge over XaaS. The takeover of Gale Technologies, a leader in providing infrastructure automation software, by Dell (NASDAQ: DELL) is another major step in the same direction. The technology that Gale provides can eradicate the need of many interfaces wherein one single interface will suffice for the various solutions that different IT organizations provide for their clients. In its 3rd fiscal quarter, Dell showed an 11% year over year business growth, and the recent addition of Gale Technologies will strengthen its infrastructure segment and hopefully add to its growing revenue. Not far behind are companies such as Oracle, which acquired Xsigo, and Brocade, which took over Vyatta for similar reasons.

This quarter Cisco did not disappoint, flaunting impressive figures in almost all financial parameters. Compared to the same quarter, a year ago, revenues have increased by about 5.5%. Also earnings per share, in a similar period of time, shows a rise of about 18%. The net income growth has also beat analyst expectations. It showed an increase of about 18%, going from $1,751 million (same quarter last year) to $2,092 million now. The current market cap of the company stands at $95.39 billion, and it has a P/E ratio of 11.7.

Not known for successful acquisitions in the past, Cisco may be able to end its bad luck with this latest acquisition. It might be too early to comment on Meraki’s impact on this networking stalwart. However, I am hoping for a positive outcome, even though that may require some time.

Gargi27 has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and VMware. Motley Fool newsletter services recommend Dell, Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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