Tucci Says “No” To Networking; Chambers Says “Yes” to Software

While reading a few earnings releases today and listening to a couple of earnings calls, two items stuck out to me from a strategic standpoint that I thought were interesting.   In particular, it seems more likely that Cisco will acquire software companies in the future rather than EMC/VMW acquiring hardware based networking companies.  

As discussed in a prior blog post, I did not think EMC would acquire Juniper even with VMware acquiring Nicira.  Well today on the EMC earnings conference call, Joe Tucci put a nail in the coffin regarding the EMC/Juniper speculation when he went out of his way in his prepared remarks to say EMC will not acquire a hardware networking company and that the VCE partnership with Cisco remains important and strategic to EMC.

Even though it was likely that Cisco competed with VMware for the acquisition of Nicira, the fact that VMware prevailed does not necessarily imply that EMC/VMware also want to enter the actual hardware element of data center networking.  Nicira is a Software Defined Networking (SDN) company that operates in the control plane layer of the SDN hierarchy.  It is a pure software company whose business model mirrors that of VMware, thus, the two together make a lot of sense (although the price paid for the acquisition is another story).   Going down the stack in the SDN hierarchy into the actual data plane where Cisco, Juniper, Arista, Brocade and others reside is not a necessary or smart outcome for VMware in my view.  So, kudos to Joe Tucci for drawing a line in the sand and staying out of a market segment he could continue to partner for today and in the future when SDN becomes more prevalent.

The other interesting item I saw today was an excerpt from an interview by Gartner of John Chambers, CEO of Cisco in Network World Magazine.  The excerpt is as follows:

 “We are going to move on multiple fronts with software,” Chambers said. Cisco’s goal is to double software revenue over the next five years, Chambers added. “The industry is set up for an open software player that integrates with every device.”

Typically when John says he wants to double revenues in an area that is small for Cisco, it typically means acquisitions.  Over the years the two companies I have heard people in the industry and press discuss the most often as potential software acquisition candidates for Cisco are BMC and Citrix.    Both are probably unlikely in my view right now.  Even though BMC has been reported by the press to be actively looking for strategic buyers, and its Enterprise Value of about $6B and forward P/E of about 11x put in the reasonable size range for Cisco, I doubt Cisco would acquire BMC as it would likely be viewed as “too legacy” of an acquisition.  Cisco needs to figure out how to get out of the low single digit organic growth rate and acquiring BMC would likely not help in that regard.  While Citrix would be a more appropriate strategic fit for Cisco given it fits it in well with Cisco’s Virtualization and Data Center priorities, Citrix has an Enterprise Value of about $11B and a forward P/E multiple of about 20x.  Add to that current valuation a reasonable take out premium of at say 20-25% and you have an expensive acquisition.  Cisco also has never acquired a company so large either in absolute market capitalization or as a percentage of its market capitalization. So while Citrix would be a nice fit, probably too big/expensive for Cisco to pursue right now.

So if not BMC or VMware, then who?  There is a multitude of small (public and private) and mid-size software companies that Cisco could pursue so guessing the right one is not easy.  In the telecommunications market, one that seems like a reasonable logical and size fit is BroadSoft. The market capitalization of about $1B and complementary aspects to Cisco’s unified communications focus would make this possible in my view.  Anybody have any other ideas on who Cisco might acquire in Software?