Cisco Has A Pile Of Cash To Spend, But Is Rival Arista Too Big To Buy?

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Cisco Systems ( CSCO ) could aim for a big acquisition in the wake of its plans to bring back some $67 billion in overseas cash, but will it have enough to truly shake up the networking sector?

[ibd-display-video id=3149216 width=50 float=left autostart=true] With Cisco's stock also trading at a 17-year high, the computer networking giant could use a combination of equity and cash to finance a big deal. Cisco stock jumped 4.7% to close at 44.08 on the stock market today after reporting fiscal second-quarter earnings and revenue that topped expectations on Wednesday.

Archrival Arista Networks ( ANET ) has a market valuation of $22 billion. That high market cap, coupled with a deal premium and the fact Cisco has earmarked $25 billion for share repurchases, could put Arista out of reach, analysts say. Arista, which reports fourth-quarter earnings late Thursday, has been grabbing share in the data center switching market from Cisco.

Other names that some analysts throw out as acquisition targets include software firms ServiceNow ( NOW ), Splunk [ticker symb=SPLK ] and privately-held Slack; data center firms Nutanix ( NTNX ) and Pure Storage ( PSTG ); as well as cyber-security technology providers like Palo Alto Networks (PANW).

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"Cisco could use extra cash coming onshore to make a transformative acquisition related to security, data analytics or (software)-as-a-service, which we think investors would applaud," said Mark Moskowitz, a Barclays analyst in a report.

Cisco has stepped up acquisitions to speed up its shift to software and services from its core business of selling network switches and routers.

Its recent acquisitions include Broadsoft, Springpath and AppDynamics. Software firm AppDynamics marked the biggest deal at $3.7 billion.

A new tax law allows U.S. companies to bring back cash held overseas at a lower tax rate. Cisco will pay more than $11 billion to bring back the $67 billion it has in overseas cash. Aside from the new $25 billion buyback, Cisco plans to use some of the cash for a dividend hike.

Cisco would have around $30 billion, including domestic cash on its balance sheet, for acquisitions.

While Cisco reported 3% revenue growth in the December quarter, some analysts said more acquisitions are needed to complete a turnaround.

"Absent more transformative acquisitions in the next couple of years, we continue to see modest revenue growth for Cisco given a multitude of structural and competitive headwinds in the near term, as well as the ongoing transition toward subscription-based revenues," said Jason Ader, a William Blair analyst in a report.

James Fish, analyst at Piper Jaffray, doesn't expect a megadeal.

"We continue to see potential M&A focused on earlier-stage software companies," Fish said in a report.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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