Another Big, Expensive Acquisition for Cisco Systems

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Networking hardware giant Cisco Systems (NASDAQ: CSCO) has always been an acquisitive company. From fiscal 2013 through fiscal 2017, Cisco spent a whopping $16.2 billion buying up companies. That spending spree hasn't helped revenue, which is down slightly over that period, but it has helped Cisco add diversity to its business. The core switching and routing segments, once Cisco's growth engines, are stagnating.

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Cisco announced its 200th acquisition on Monday. The company agreed to pay $1.9 billion, net of cash and assuming fully diluted shares including conversion of debt, for BroadSoft (NASDAQ: BSFT), a provider of cloud communications, collaboration, and contact center services. Collaboration has been one of Cisco's growth businesses in recent years, although the segment produced a small decline in revenue during fiscal 2017. Adding BroadSoft to the portfolio should help return the collaboration business to growth, but the price Cisco is paying looks a little rich.

The deal

Cisco will pay BroadSoft shareholders $55 per share in cash to acquire the company. That price represents barely any premium over the stock's closing price last Friday, but it is about 60% higher than the 52-week low.

BroadSoft generated $341 million of revenue in 2016, up 22% compared to 2015. Growth has slowed down this year, with second-quarter revenue rising just 8.5% year over year. BroadSoft won't be any help to Cisco's bottom line initially, with the company posting a GAAP net loss of $8 million over the trailing-12-month period.

BroadSoft is the leader in the cloud unified communications market, with Cisco a strong No. 2 player. Combining the two companies will turn Cisco into the dominant market leader. Once the deal closes during the first quarter of 2018, BroadSoft will be integrated into Cisco's unified communications technology group.

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Cisco sees the BroadSoft acquisition as a way to broaden its portfolio in an important market. Cisco SVP Rowan Trollope weighed in on the deal in the company's press release:

Together, Cisco and BroadSoft will deliver a robust suite of collaboration capabilities across every market segment. We believe that our combined offers, from Cisco's collaboration technology for enterprises to BroadSoft's suite for small and medium businesses delivered through Service Providers will give customers more choice and flexibility.

Another expensive acquisition

Acquiring BroadSoft makes strategic sense, but Cisco is paying a fairly high price for the company. The $1.9 billion offer price is about 5.5 times BroadSoft's annual sales. Those sales could rise sharply after Cisco integrates BroadSoft's offerings with its own, but that's far from guaranteed.

The BroadSoft acquisition may look expensive, but it's nothing compared to Cisco's acquisition of AppDynamics earlier this year. Cisco swooped in and paid $3.7 billion for the start-up one day before the company was set to go public at a roughly $2 billion valuation. AppDynamics was on pace to generate around $230 million of revenue in 2016 at the time of the deal, so Cisco paid around 16 times sales. And unlike BroadSoft, which is close to breaking even, AppDynamics posted a net loss of $95 million through the first nine months of 2016.

Acquisitions have been part of Cisco's growth strategy for a long time, but as a Cisco investor, I'm a little concerned about the apparent lack of discipline in these deals. The BroadSoft acquisition is easier to stomach than the AppDynamics acquisition, but Cisco is still paying an awful lot for not much revenue and no benefit to the bottom line.

Cisco stock punched out a new decade-high following this deal, so the market doesn't seem all that concerned. That may change if these acquisitions don't start bearing fruit soon.

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Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.