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Cisco (CSCO) to Buy Acacia to Boost Optical-Based Networking

Zacks Equity Research

Cisco Systems CSCO recently expressed its intention to acquire Acacia Communications ACIA, an optical networking technology company, for $2.6 billion in cash and marketable securities. Consequently, Acacia shareholders will obtain $70 per share in cash, approximately a premium of 46% over the $64.91 price on Jul 8, 2019.

Cisco anticipates the acquisition to close in the second half of next year subject to customary closing conditions. Post the deal closure, Acacia will join Cisco's Optical Systems and Optics group — networking and security business.

Massachusetts-based Acacia designs, develops, manufactures and markets communication equipments. The company offers coherent optical interconnect products for cloud infrastructure operators and content and communication service providers. It operates primarily in the Americas, Europe, the Middle East, Africa and the Asia Pacific region.

According to Cisco’s executive vice president of its networking and security business, David Goeckeler, “The acquisition of Acacia will allow us to build on the strength of our switching, routing and optical networking portfolio to address our customers' most demanding requirements."

Shares of the company have gained 30% in a year’s time, outperforming the industry’s rally of 28.4%.

Synergies from Buyout

The integration of Acacia’s optical technology with Cisco’s network and cloud security platforms is likely to enhance security features further. This will help Cisco make more differentiated products, thereby mitigating phishing incidents on devices. This acquisition will aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.

Further, the deal will help the company add more fundamental technology to its open-source software in order to build networking machinery. With this buyout, Cisco’s customers will be able to experience greater flexibility in operations, enhanced multi-level security, increased awareness and greater administrative control.

Acacia is currently an existing supplier to Cisco. The former helps the latter to design and develop high-speed, optical interconnect technologies that cater to the ever increasing consumer demand for data.

We believe that the acquisition will allow both the companies to better integrate technologies. Further, Acacia acquisition will also help Cisco bolster optical system portfolio and allow it to better compete against competitors. The company stated that it will continue to serve Acacia’s customers, while also integrating Acacia’s technology with its own in order to better serve customers and expand customer base.

What Investor’s Needs to Know

The growing clout of optics to address emerging network infrastructure demands of power and density deserves a special mention. With Acacia buyout, the company aims to expand optical transceiver portfolio to support higher bandwidth, primarily for its data center customers.

Increasing internet penetration worldwide is causing higher internet traffic, which in turn is fueling demand for higher bandwidth. In fact, per latest data from Cisco’s VNI forecast, worldwide internet traffic is expected to more than triple to 13.2 exabytes per day in 2022, up from 4.1 exabytes per day in 2017.

Cisco’s Infrastructure Platforms comprise Switching, NGN routing, Wireless and Data Center solutions, which accounted 58.5% of total third-quarter fiscal 2019 revenues. Revenues grew 5% from the year-ago quarter to $7.55 billion.

Per a MarketsandMarkets report, digital transformation market is envisioned to witness a CAGR of 19.1% to $493.39 billion by 2022 from $205.99 billion in 2017. Per ResearchAndMarkets data, global 5G market is expected to reach $251 billion by 2025 at a CAGR of around 97% from 2020. The aforementioned reports reinforce our belief that this acquisition holds promise.

To Conclude

Over the past few years, strategic acquisitions have played an important role in shaping Cisco’s growth trajectory. The company recently concluded the deal to buy Luxtera. The company intends to deploy Luxtera’s integrated optics technology capabilities across its robust network portfolio featuring capacities ranging from 100GbE (Gigabit Ethernet) to 400GbE. This will enable Cisco to provide ultra-high, data-heavy bandwidth services to CSPs and network service providers.

The company had also announced that it has successfully closed the buyout of privately-held Duo Security. This buyout will aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.

Continuous strategic acquisitions should support Cisco in expanding product offerings, strengthening footprint in the security markets and building customer base. Further, these buyouts reveal the company’s intention to improve its software and service capabilities in order to diversify revenue streams toward sources of a more recurring nature. It is taking this initiative in a bid to mitigate the cyclicality associated with hardware sales.

However, these acquisitions are likely to keep Cisco’s operating margins under pressure, as it requires significant amount of new investments.

Zacks Rank and Other Stocks to Consider

Cisco carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader technology sector are Dropbox, Inc. DBX, and Lattice Semiconductor Corporation LSCC, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dropbox and Lattice Semiconductor have a long-term earnings growth rate of 14.2% and 12.5%, respectively.

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