Cisco Bolsters Networking Portfolio, Targets Data Demand With Ubiquisys Acquisition

by Trefis Team
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Quick Take

  • Cisco announces intent to acquire Ubiquisys, which will bolster its network management software capabilities.
  • The acquisition will help Cisco tap wireless carriers’ need for more efficient networks as data demand explodes.
  • The recent spate of acquisitions suggest a growing focus on software rather than hardware, which faces the risk of commoditization.

Cisco (NASDAQ:CSCO) recently announced its intention to acquire UK-based small cell vendor Ubiquisys – a move that demonstrates the networking giant’s growing focus on wireless carriers and software-based networking technologies. The deal will cost Cisco about $310 million in cash and other incentives and give it access to Ubiquisys’ small cell and self-optimizing network (SON) technologies, thereby helping it strengthen its mobile carrier product portfolio.

Small cell technology helps to prevent wireless network congestion by offloading traffic from macro networks, a much more efficient way to accommodate growing traffic than building new cell sites. [1] Self-optimizing networks improve network capacity by automatically allocating traffic between towers based on capacity and availability. [2] These technologies have become more prominent in recent years due to the burgeoning demand for mobile data, which has put increased pressure on carriers’ existing network infrastructure and limited spectrum resources.

At the heart of this acquisition is Cisco’s attempt to gain share in the service provider market, where its lead over competitors such as  Juniper Networks (NYSE:JNPR) isn’t as commanding as in the enterprise market. Cisco’s focus on wireless carriers has been increasing of late, as evidenced by recent acquisitions such as Intucell, BroadHop, Cognitive Security, Cariden and ClearAccess (see Cisco Focuses On Service Providers And Software With Intucell Acquisition). These acquisitions also demonstrate the company’s desire to diversify its revenue streams toward sources of a more recurring nature in order to mitigate the cyclicality associated with hardware sales.

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Carriers Need Scalable, Efficient Networks

With data demand exploding, mobile carriers in the U.S. are increasingly looking to make their networks more spectrum-efficient and put their network resources to use without having to materially increase CapEx spend. The proliferation of smartphones is already causing mobile data traffic to grow exponentially, and the advent of high-speed LTE networks is likely to accelerate that growth. Mobile data traffic grew by 70% in 2012 and is expected to grow at a CAGR of about 65% over the next five years, according to a recent Cisco VNI report. [3] Accordingly, networking solutions that allow carriers to manage traffic efficiently are only going to increase in importance in the coming years.

With the acquisitions of Intucell and Ubiquisys, Cisco is looking to tap this market and broaden its relationship with carriers by adding  network management solutions to its product portfolio. AT&T’s deployment of Intucell’s SON technology and Japan-based Softbank’s use of Ubiquisys’ small cell technology show the increasing value of such solutions within carrier networks. AT&T has said that using SON has resulted in a 15% reduction in network congestion and improvement in call retainability across tested markets. [2] Cisco is hoping that the increased carrier focus will help it gain more ground in the core and edge routing segments, where rivals Juniper and Alcatel Lucent have substantial market shares.

Restructuring Has Renewed Cisco’s Focus

The spate of recent acquisitions, together with Cisco’s recent decision to sell its home networking Linksys division, show that the company is focusing more on the software side of networks than the hardware, which is becoming increasingly commoditized. Cisco’s recent restructuring initiatives have also renewed its focus on its core networking areas as opposed to its earlier ambitions of diversifying into 30 new businesses. The restructuring has led to cuts in non-core areas, and has improved margins while making the organization leaner and more efficient as a result.

The enhanced focus and efficiency should allow the company to innovate more rapidly and provide additional flexibility to take part in M&A deals that help it target new trends. It also streamlines its businesses around the core networking products that contribute almost 40% of our estimated $27 fair value for Cisco.

The long-term trends of massive data demand growth as well as cloud computing’s growing usage in the enterprise remain strong, which should increase demand for Cisco’s networking gear as enterprise spending recovers. In line with this view, Cisco’s stock has climbed nearly 25% in the past five months and is now trading around 20% below our price estimate.

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Notes:
  1. Cisco Licensed Small Cell Solution, Company Site []
  2. Self-Optimizing Network Helps Improve AT&T Network, AT&T Press Release [] []
  3. Global Mobile Data Traffic Forecast Update, 2012–2017, Cisco, February 6th, 2013 []
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