Cisco Buying Meraki for $1.2 Billion for Wi-Fi Networking

Cisco Systems Inc. (CSCO) agreed to pay $1.2 billion for closely held Meraki Inc., adding technology that helps businesses manage Wi-Fi networks remotely and expanding its lineup of products for mid-sized customers.

Cisco, the world’s largest maker of computer-networking equipment, is using a combination of cash and retention-based incentives to pay for the acquisition, the San Jose, California- based company said yesterday in a statement.

Chief Executive Officer John Chambers is seeking to capitalize on the boom in demand for smartphones and tablets in the workplace by snapping up a company that helps businesses manage security and wireless access points via the Internet. The deal is aimed at broadening the customer base as Cisco cuts costs, shuts underperforming divisions and trims prices to fend off rivals such as Hewlett-Packard Co. (HPQ) and Juniper Networks Inc. (JNPR)

“The valuation reflects that Wi-Fi, as a market, has very compelling growth prospects ahead,” said Erik Suppiger, an analyst at JMP Securities LLC in San Francisco who rates Cisco market perform.

Cisco shares rose 1.7 percent $18.30 at the close in New York. The stock is little changed in the past year.

San Francisco-based Meraki expects about $100 million in bookings this year, and its employee base has ballooned to 330 from 120, Meraki CEO Sanjit Biswas wrote in a letter to employees discussing the deal.

Cisco’s Approach

Cisco approached Meraki with the offer several weeks ago with the pitch of extending the company’s reach with worldwide distribution through Cisco’s sales apparatus. Cisco was attracted by Meraki’s technology and financials, Biswas wrote.

Meraki will allow Cisco to expand in software markets that have high profit margins and recurring revenue, Hilton Romanski, vice president of business development for Cisco, said on a conference call today with analysts. He declined to specify how much of Meraki’s revenue is recurring.

“This is a very attractive combination of a high-margin, high-growth software business,” he said.

Entering businesses with recurring revenue is important for Cisco because 80 percent of the company’s sales every quarter now come from new business, Frank Calderoni, Cisco’s chief financial officer, has said.

Software, Services

Cisco has been shifting to focus more on software and services, areas that are more profitable and with more predictable revenue than sales of networking hardware. Cisco intends to acquire companies specializing in those markets and make them a bigger part of Cisco’s business, Chambers said on the company’s latest earnings call, on Nov. 13.

The Meraki acquisition is an acknowledgment of the success that companies such as International Business Machines Corp. and Oracle Corp. (ORCL) have had by focusing on software and services. It also signals Cisco is changing its traditional approach of selling primarily equipment while letting partners perform many of the surrounding services.

Meraki has offices in New York, London and Mexico and was formed in 2006 by doctoral candidates from Massachusetts Institute of Technology. Its backers include Google Inc. (GOOG) and venture capital firm Sequoia Capital. Cisco expects the deal to close in the second quarter of next year.

Sequoia Capital

Google was one of Meraki’s first customers, buying 1,000 routers and investing in the company in its early days, attracted by the convenience of Meraki’s technologies in managing networks, Doug Leone, a partner at Sequoia Capital, wrote in a blog post today.

“Before Meraki if you got a call at 1 a.m. you’d have to go into the office, access a control panel and fix the issue yourself, or even travel to the location of the problem,” Leone wrote. “With the webapp, network admins can log on via their browser and get a centralized view of all their deployments, right down to the device level.”

Google spokeswoman Katelin Todhunter-Gerberg declined to comment.

Cisco, which had planned to announce the acquisition later today, inadvertently posted a blog about it yesterday, according to Karen Tillman, a spokeswoman for the company.

The deal comes as the computer-networking industry is undergoing a shift toward software that eliminates the need for some expensive types of equipment and gives administrators more remote control over their networks. Established rivals and startups have been putting pressure on Cisco’s profit margins, forcing the company to undergo a restructuring.

Chambers has cut 7,800 jobs over the past year and a half, closed businesses such as the Flip video-camera unit and eliminated bureaucratic bottlenecks in a bid to speed decision- making and focus Cisco’s resources on the company’s key networking businesses.

To contact the reporter on this story: Jordan Robertson in San Francisco at jrobertson40@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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