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Cisco Systems (CSCO) Likely to Buy Luxtera: Good Move?

According to Bloomberg, Cisco Systems CSCO is in talks to buy Luxtera Inc., an optical chip technology company, for an undisclosed amount.

Per sources familiar with the matter, the deal could be worth hundreds of millions of dollars. According to reports, Cisco was the winner, beating the peers Intel Corp. INTC and Broadcom Inc. AVGO, in the bid to acquire Luxtera.

However, details are scarce at this point because neither party was available for comment. Notably, it’s even possible that the buyout agreement might not even materialize.

Headquartered in Carlsbad, CA, Luxtera’s silicon photonics technology offers high speed of data transfer across video streaming, cloud and mobile. The deal will help Cisco add more fundamental technology to its open-source software in order to build networking machinery.

Coming to the price performance, shares of Cisco have returned 23.4% in a year, outperforming the industry’s rally of 20.5%.

Synergies from Buyout

The integration of Luxtera’s silicon photonics technology with Cisco’s network and cloud security platforms is likely to further enhance security features and help the latter 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.

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.

Cloud technology is being increasingly adopted across businesses to innovate, handle greater volumes of sensitive data, protect against cyber-security threats and drive growth. This merger will help both the companies leverage each other’s resources to create an innovative business model and make the environment more secure.

To Conclude

Over the past few years, strategic acquisitions have played an important role in shaping Cisco’s growth trajectory. The company closed the acquisition of Accompany for $270 million and privately-held Duo Security for $2.35 billion in cash.

Cisco also announced its plans to acquire Burlingame, CA-based July Systems. Cisco is well poised to leverage the modern technology at various levels of its operations and gain a competitive edge.

Continuous strategic acquisitions should support Cisco in expanding its product offerings, strengthening footprint in the security markets and building customer base. Further, these acquisitions reveal the company’s intention to boost its software and service capabilities in order to diversify revenue streams to make it more recurring in nature. It is taking this initiative 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 Stocks to Consider

Currently, Cisco carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector is Twitter, Inc. TWTR, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Twitter has long-term expected earnings growth rate of 22.1%.

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