Cisco Enhances Security Portfolio With Neohapsis Buy

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In a bid to enhance its cyber-security capabilities, Cisco (NASDAQ:CSCO) recently announced its intent to acquire Chicago-based security advisory firm Neohapsis for an undisclosed sum. The deal is expected to close by the end of January next year. [1] Neohapsis currently provides risk management, compliance advice as well as cloud, mobile and enterprise security solutions to Fortune 500 companies. The deal follows Cisco’s acquisition of ThreatGRID earlier this year and will likely enhance Cisco’s Advanced Malware Protection (AMP) portfolio of security solutions and help it improve its network security services, both on-premise and in the cloud. Cisco’s AMP products and solutions were originally developed by Sourcefire, which the networking giant acquired in a $2.7 billion deal in 2013. [2]

Cisco also upgraded its AMP and data center security offerings earlier this year to help customers combat the most advanced malware threats and other advanced persistent threats. These efforts are likely to help the company effectively compete with rivals such as Palo Alto Networks (NYSE:PANW), Check Point and Juniper (NYSE:JNPR) in the cyber security space, where it has lost share in recent years. The acquisition can also be seen as an extension of Cisco’s focus on the security aspect of its integrated architecture concept-Application Centric Infrastructure (ACI).

We have a price estimate of $27 price estimate for Cisco, which is in line with the current market price.

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Rapid Growth In Virtual Security Appliances Market Expected

The virtual security appliances market is expected to grow rapidly in the next five years on account of robust demand from enterprises, carriers and data centers. A rapid rise in data traffic is forcing service providers and large enterprises to upgrade their data centers and security capabilities. This is also being fueled by the robust increase in the deployment of network infrastructure based on software-defined networking (SDN) and network functions virtualization (NFV). The global virtual security appliances market is expected to double in the five-year period ending 2018 to reach $1.2 billion, according to research firm Infonetics. The company also expects the data center security appliances market to grow to $2.7 billion in the same period. ((Growth spike expected in virtual security appliance market, driven by SDN and NFV, Infonetics, Nov 11 2014))


Security As Key Component Of Cisco ACI

Security is an important component of all networking products and services, and as Cisco transitions from a hardware manufacturer into a software solutions company, it is changing the way it provides security. The company is trying to build an architecture in every business division where hardware, software and service collaborate to make it convenient for the customer. This architecture, or ACI, essentially integrates Cisco’s Internet Of Everything concept with the cloud, data centers, mobility as well as security. This absolves the customer of all responsibility to integrate various systems and enable better and secure delivery of services.

All in all, the company is looking at a business model where an architecture will integrate all products and services, and software licensing will be the main revenue driver. However, this will allow customers licensing Cisco’s software to use cheaper, white-label products, commoditizing hardware and impacting Cisco’s product margins. Also, customers using white-label products might opt for software providers other than Cisco. Therefore, losing customers remains a threat for Cisco in its plans to dissociate software from hardware. If Cisco can develop an architecture with efficient integration, product bundling and security, it should be able to incentivize existing clients to stick with the company and also compete with white label products.

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Notes:
  1. Cisco Announces Intent to Acquire Neohapsis, Cisco, Dec 10 2014 []
  2. Cisco completes acquisition of cybersecurity firm Sourcefire, Zdnet, Oct 8 2013  []