Is Cisco Ready to Get Back in the M&A Game?


By: R. Scott Raynovich

Some of you may have noticed we enjoy speculation about Cisco’s merger and acquisition (M&A) activity. It’s fun, not only because deals are fun but because Cisco is one of the most prolific buyers of companies in the networking, security, and cloud technology markets.

With the valuations of smaller tech companies falling across the board and Cisco's profits and balance sheet remaining strong, 2023 is looking like a good time to pull the trigger.

Will they do it? We will see. The chatter is out there -- but there was chatter all last year and nothing big happened. Perhaps falling valuations will now be the catalyst.

Why Has Deal-making Stopped?

One thing that's shocking: Cisco's M&A activity has ground to a near halt. See the chart below supplied by Bloomberg Intelligence. Over the past two decades, Cisco has averaged 6.5 deals per year. Recently? Almost nothing.

Source: Bloomberg Intelligence

Cisco was rumored to be pursuing several significant deals in 2022 – but nothing big happened (we were only responsible for one rumor, while many others surfaced in the news).

Things have picked up a little bit. After only acquiring two small companies last year, Cisco has already announced two small deals so far this year, including Valtix and Lightspin Technologies, but barely anybody has heard of them and they look like very small "tuck-in" acquisitions.

What people are waiting for is the big one. After a lackluster 2022, there is reason to believe Cisco may be ready to crank things up in 2023. Here are the main reasons:

  • In the wake of rising interest rates and a tech slowdown, valuations for startups and public companies are down anywhere from 20%-70% across the board from peak levels early in 2023.
  • Large companies with strong balance sheets, such as Cisco, are in a stronger position to make deals.

Bloomberg Intelligence analyst Woo Jin Ho recently noted some of these factors, including Cisco’s penchant for doing deals for all cash – which would be attractive to sellers in a tighter funding environment. In a private note for Bloomberg Intelligence subscribers that he shared with Futuriom, Ho wrote:

“We think Cisco could be more competitive in deals, as the lower valuations may make it difficult for companies to use stock for M&A currency vs. Cisco’s preference for all-cash deals. Cisco has $22 billion in gross cash and $13 billion net cash.”

Ho believes that Cisco is most likely to target infrastructure software for acquisitions. This is the same area that fueled speculation that Cisco would be interested in Splunk or HashiCorp last year. But with a further drop in market valuations over the past six months, Cisco’s options have likely widened considerably to include a large number of smaller software startups that may find raising money for expansion more difficult in 2023, according to Ho.

Would Cisco Go Big Now?

If Cisco wants to go bigger, the valuations are also more attractive for some of the fast-growing public companies that have lost a lot of value recently, making them more digestible for Cisco, which has a market cap of $210 billion. A list of potential ideas included in Bloomberg’s note include Cloudflare ($17B enterprise value), Zoom Video ($15B), Splunk ($16.7B), Dynatrace ($10.7B), Okta ($13B), Elastic ($5B), HashiCorp ($4.4B), New Relic ($4.6B), and Fastly ($2B).

This group of companies have had their valuations hit by rising interest rates, which affects smaller, fast-growing companies more than large, mature companies such as Cisco, which has held its value better.

Tracking the valuations of these companies on an enterprise value/sales (EV/S) ratio, Bloomberg data shows that many of them have dropped more than 50% in price – which screams: Sale! For example, Cloudflare has fallen 70% from its peak valuation as measured by EV/S, while Dynatrace has fallen by 60% and HashiCorp has fallen by 50%. Many other companies have fallen along similar lines.

“Falling infrastructure software and chip valuations compared with the past two years may enable Cisco to be more competitive in any potential dealmaking," wrote Ho. “Valuations for small- and mid-cap infrastructure-software companies average 6.8x forward sales, which is less than the 18.6x group average and 27x average peak multiple from 2020-21.“

Combine the falling valuations of smaller companies with the relative strength of Cisco’s balance sheet and you get a recipe for deals.

This dynamic is not limited to Cisco. The recent rally in the Nasdaq Composite Index has been concentrated in larger-cap technology companies with strong balance sheets, putting them in a position of power. This could fuel a surge of M&A activity by companies with large cash balances going after smaller companies with attractive technology but more constrained funding.