As we continue to screen M&A deals in the tech space, our attention today was caught by Cisco Systems. Here’s our quick take.
Growth Problem
Cisco has a growth problem, so it’s looking at targeted deals to bulk up in the right places at a time when rivals are keen to challenge its dominance in the networking market.
It announced today its intent to acquire OpenDNS for “$635m in cash and assumed equity awards, plus retention based incentives for OpenDNS.”
The acquired company is a private entity based in San Francisco. It provides advanced threat protection for “any device, anywhere, anytime”– admittedly, this is a decent move strategically, but one that doesn’t move the valuation needle.
The deal is expected to close in the first quarter of fiscal year 2016, boosting Cisco’s Security Everywhere approach by adding broad visibility and threat intelligence from the OpenDNS cloud delivered platform, Cisco said.
What’s Next?
In truth, Cisco needs a more aggressive capital allocation strategy aimed at boosting its trading multiples (15.4x p/e and 14x p/e for 2015 and 2016, respectively; 7x EV/Ebitda and 6.5x EV/Ebitda for 2015 and 2016, respectively).
That’s been the case for a few years now.
OpenDNS is just a bolt-on deal for Cisco, and that’s reflected in its equity valuation, which is in negative territory in late trade today. Its stock remains a fully priced yield play rather than a growth play, with a forward dividend yield just below 3%.
Today Cisco has underperformed the S&P 500 and the Nasdaq, which are up 0.3% and 0.5%, respectively, at the time of writing.
Frankly, that’s hardly surprising.