Cisco’s WLAN Dominance Unlikely To Be Affected By HP’s Aruba Acquisition

Hewlett-Packard (NYSE:HPQ) is set to acquire wireless LAN (WLAN) provider Aruba Networks (NASDAQ:ARUN) for $2.7 billion. This acquisition will help HP boost its share in the global WLAN market and position it as the second largest Wi-Fi player after networking giant Cisco (NASDAQ:CSCO). ^[1]

In addition to boosting HP’s market share, the acquisition makes sense for the WLAN industry as a whole, considering that Cisco is a very dominant player and the HP-Aruba combination could take advantage of cost and revenue synergies and challenge Cisco’s position. The global WLAN market is currently dominated by Cisco with about a 52% share followed by Aruba (~13%) and HP (4-5%). ^[2]

In this article, we talk about the impact of HP’s acquisition on the WLAN industry as a whole and Cisco in particular. We have a $26 price estimate for Cisco, implying a discount of about 10% to the current market price.

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Uncertainties Over Deal Advantages

The proposed Aruba acquisition is HP’s first major deal since its disastrous $11 billion acquisition of enterprise software company Autonomy Corporation in 2011. In fact, HP’s past experience with acquisitions in general hasn’t been very rewarding. In the wireless LAN space, it bought Colubris in 2008 and 3Com in 2010 but wasn’t able to capitalize on their wireless technology portfolios, stalling the company’s rise in the global WLAN market. Therefore, there is little evidence to support the fact that the HP-Aruba combination is going to be any more threatening to Cisco than they were on their own before the deal.

An important inference to draw here is that HP is acquiring Aruba to become a significant player in the fast growing WLAN market, which it hasn’t been able to achieve on its own. This raises questions about the level of synergies both companies are likely to enjoy after the deal is complete. Another issue is that several HP competitors such as Dell, Juniper and Brocade are Aruba clients and it is uncertain whether status quo will be maintained after Aruba becomes a subsidiary of HP. ^[3]

Impact On Cisco

Looking at Cisco’s solid recent performance in the wireless business (sales grew 8.5% year over year in CY2014 and 18% in quarter ending January 2015), especially after its acquisition of Meraki in 2012, the company has little to worry about in the near term. The global WLAN market is expected to grow 40% to about $13 billion by 2019 and Cisco’s current networking assets, large client base and innovative product offerings should be sufficient to maintain its dominance. However, the HP-Aruba combine could put some pressure on Cisco’s wireless margins in the near term.

In addition, HP could leverage its global exposure and presence in various verticals such as education, healthcare and financials to bring new clients to the fold and help Aruba expand its business globally, considering that Aruba already has a robust product portfolio. Until recently, Wi-Fi networks were not an essential part of the enterprise environment because users rarely had more than one wireless device. However, the rapid proliferation of wireless devices in recent years has impacted the work environment as well as people’s work habits, making Wi-Fi an absolute necessity in the office as well as public space. This is indicative of the diversity of verticals where the WLAN market can expand into. The mobile device market, including notebook PCs, tablets and smartphones, is expected to reach close to 2.6 billion units by 2016, according to research firm Canalys. ^[4]

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1. HP to buy Wi-Fi gear maker Aruba Networks for $2.7 bln, Reuters, March 3 2015 [↩]
2. Wireless LAN Infrastructure Market Grows Six Percent, According to Dell’Oro Group, Market Watch, Sept 2 2014 [↩]
3. Aruba Networks is different than HP’s failed wireless acquisitions, Network World, March 2 2015 [↩]
4. Mobile device market to reach 2.6 billion units by 2016, Canalys, Feb 22 2013 [↩]