Multiple New Acquisitions May Enhance This Company's Position

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

Cisco Systems (NASDAQ: CSCO) is a market leader in the networking segment. The company specializes in IP based switching products and has global presence. With over 60% market share, the company has massive clout. Cisco is now trying to augment its position with organic growth as well as acquisitions and the company had been mulling purchase of various outfits including Sourcefire (NASDAQ: FIRE). Apart from acquisitions, Cisco also provides a compelling case for going long on the future prospects of the company.

Let’s have a look at the main points going in favor of this California based computer networking company.

Growth through acquisitions

The company recently acquired JouleX, an energy management startup. JouleX offers software solutions for better energy management. Its software also lets administrators  monitor and adjust power usage. JouleX has various collaborations with leading companies such as Siemens and Intel. As per the news, Cisco paid $107 million for the acquisition of the energy management company.

With this new acquisition, Cisco will have an edge over its networking peers such as Juniper Networks, (NYSE: JNPR) as it will now be able to provide energy management solutions for a wide range of networking and switching products. Juniper is currently struggling with the soft enterprise market. However, it reported strong results for the second quarter of the year where it managed to reverse the declining trend for revenue. Juniper is trying to augment its position in the networking service provider segment, which accounts for two-thirds of its revenue. Cisco’s new acquisitions will pose a new challenge for Juniper as Cisco is now in a position to provide related services in one single package.

Cisco can now unlock the full potential of the JouleX technology by incorporating it in its wide range of switching products and beyond. Also, software energy management is a relatively new and untapped segment. In this case, Cisco will be able to exploit first mover advantage. The segment also boasts of higher gross margins, which may help Cisco in boosting its overall profitability.

Another point that goes in Cisco’s favor is that it is able to combine energy management hardware with energy management software, and benefit from the resulting synergies. It gives the company an advantage over pure players dealing in only hardware or software.

Technological aspects of the JouleX acquisition

The JouleX acquisition compliments Cisco's EnergyWise offering, which marks its entry into the DCIEM sector, a growing initiative that manages data center energy wastage. According to a study, American data centers and other companies waste over $2.8 billion in power consumption and produce an immense amount of unnecessary carbon footprints simply because they fail to shut down their PCs when they leave from work. Cisco EnergyWise is a power management architecture that monitors devices connected through a Cisco network and optimizes power consumption. JouleX solutions will enhance the capabilities of Cisco EnergyWise through a cloud-based power management platform that does not require any device side hardware or software installation.

Sourcefire to add more fire

Cisco is not sitting idle after acquiring JouleX. It has already announced its plans to acquire Sourcefire. With the rumored purchase price of about $2.7 billion, the acquisition is going to be much bigger and more significant than JouleX. Sourcefire is a leading cyber security solutions provider and its stock has grown more than 5 times since its stock market debut in 2007.

While the markets are speculating about the hefty price premium paid by Cisco for acquiring Sourcefire, intensive study reveals that the transaction is likely to provide a big bang for the buck. The deal will not only help Cisco in augmenting its network and internet security portfolio but will also help it gain access to lucrative corporate and government markets. Sourcefire has prominent position in the government security solutions segment.

At the very same time, there are concerns about integration of Sourcefire products with Cisco’s existing solutions. However, Cisco expects the acquisition to “accelerate delivery of Cisco's security strategy of defending, discovering, and remediating the most critical threats.” It is also likely that the company will be able to stem erosion of its market share in the network security segment. It will also boost the company’s research potential as Cisco will be making key "acqui-hires" through the merger.

Is Cisco a good buy?

Cisco has maintained good growth trajectory and the stock has maintained an attractive rate of return. Apart from capital growth, Cisco also provides a dividend yield ratio of 2.67%, which qualifies it as a good investment pick for an income portfolio. 

The company is in the maturity phase with stagnating growth; however management is working to counter the issue through a series of acquisitions. The new purchases will create new revenue streams and boost its research profile. Cisco is also expanding its international profile to counter slower growth rates in the domestic market. The company currently enjoys higher margins in the EMEA segment than in the US markets. Overall, Cisco is expected to provide high growth in the long run and is a good investment opportunity.

 

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Veeksha Rao P has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Sourcefire. 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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