On a very stormy day on the East Coast where my newly purchased standby gas generator is keeping my computer and lights humming, I had some time to listen to the conference call today where Riverbed announced its plans to acquire Network/Application Management company Opnet. My quick take on this deal is that Riverbed is making a bold move to double down in the tangential market of Network/Application Management, but the Street is likely to take a wait and see approach on how they execute on this strategy. I think owners of the stock were looking for a strong product refresh cycle in its core WAN Optimization business. The story just changed, with the ultimate outcome unclear. While the stock had a nice upward move after a good 3Q result, it likely stalls in the near/intermediate term in my view.
Overall, I can see why Riverbed is doubling down on Network and Application Management, building on its small but rapidly growing Cascade business. Namely, the traditional WAN Optimization business that forms the vast majority of Riverbed’s sales and the core of the company is now growing slightly less than 10%. In order for Riverbed to sustain longer-term growth of 15% or more (an unofficial metric to be perceived as a reasonable growth company in the technology industry), Riverbed needs to expand into new markets. Since the early acquisitions in Network Monitoring/Management over the past three years are finally putting up solid growth of over 30% as Riverbed gains share, why not double down and try to be the market leader in this overall market that is very fragmented.
Riverbed dabbled in networking monitoring/diagnostics via its acquisition of Mazu back in early 2009. It then added the acquisition of CACE in October of 2010. These two deals, however, were closely linked to the core WAN Optimization business as the respective diagnostic/monitoring products were primarily focused on determining need and how to best deploy WAN Optimization appliances within an Enterprise. With the acquisition of Opnet, Riverbed is dramatically expanding within the Network and Application Management market as Opnet’s products offer more broad performance data than just the WAN Optimization application.
While attending Interop NY in September of this year, I thought that the Network Monitoring and Diagnostic industry would see convergence between Test/Diagnostic companies like Ixia and JDSU and Networking/Application Management companies like Opnet, Gigamon etc… With Ixia acquiring BreakingPoint Systems in July of this year, I had though we would see further consolidation of the entire test equipment, diagnostic, monitoring and management segments given how fragmented these industries have become. I even thought JDSU would respond to Ixia’s acquisition of BreakingPoint and consider a larger deal in this market. So, Riverbed’s move is not surprising given they were a niche player in the market, but one that was not so obvious to me a couple of months ago.