Technology

Are Investors Forcing Cisco to Make a Big Acquisition?

Over the years, Cisco Systems Inc. (NASDAQ: CSCO) has been active yet conservative in its mergers and acquisitions (M&A) strategy. As its business continues to mature and secular headwinds grow, one brokerage firm believes that it will need to consider bigger bets to drive growth and accelerate its transition to a software/recurring business model.

Oppenheimer maintained an Outperform rating with a $32 price target, which implies upside of 17.8% from the current price level. This is based on the idea that Cisco should use M&A more to drive incremental growth and accelerate its transition to software/recurring revenue business model.

The firm surveyed 60 institutional investors, and the findings were that they are ready for Cisco to go bigger (but are split on how big) and view Security and Cloud/SaaS as key areas. Although the list of potential targets includes usual suspects — Palo Alto Networks Inc. (NYSE: PANW) and Fortinet Inc. (NASDAQ: FTNT) — it also includes new areas of opportunity — Red Hat Inc. (NYSE: RHT) and ServiceNow Inc. (NYSE: NOW). And while storage was only number four in the focus list, Oppenheimer believes hyper-converged vendors (Nutanix, Simplivity, etc.) are prime candidates. It remains to be seen if Cisco will act, but sentiment seems open-minded.

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The survey suggests investors are somewhat split on how big of an acquisition Cisco should consider. About 36% of respondents indicated they wanted no larger than $15 billion acquisitions (just outside of Cisco’s current $10 billion comfort zone), while roughly 56% indicated they would feel comfortable with far larger deals of up to $25 billion and even greater.

According to Oppenheimer in the report:

The good news is that investors want Cisco to buy in areas in which it’s already active. Security (first) and cloud/ SaaS (second) were investors’ top choices when picking from eight areas on which Cisco should focus. While Cisco’s recent acquisitions have been in these areas, they’ve been small (<$1 billion). We note big data/storage were third/forth priorities.

The firm added:

Consistent with the areas of focus, respondents highlighted Palo Alto (#1) and Fortinet (#4) as key security targets. Interestingly, Nutanix was second in priority, emphasizing investors’ interest in having Cisco address the shifting trends in the industry (hyper-convergence) and pending consolidation (EMC/Dell). Interestingly, ServiceNow (#3) and Red Hat (#5) were also top of mind.

Overall, Oppenheimer thinks the survey indicates readiness from investors for a more aggressive M&A posture from Cisco. From the firm’s perspective, Cisco at the very least needs to step slightly out of its comfort zone to drive growth and accelerate its transformation with security and hyper-convergence key priorities.

Shares of Cisco were trading at $27.32 Thursday morning, with a consensus analyst price target of $31.14 and a 52-week trading range of $23.03 to $30.31.

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