What’s brewing at Cisco?

Although Cisco chief executive John Chambers has thrown cold water on speculation about a large acquisition, the market continues to buzz about possible deals by the networking giant. Observers who think Cisco is big-game hunting point to a number of unusual moves from the company, which – with a bit of reading between the lines – appear to suggest something big is brewing.

For starters, they point to the fact that Cisco has largely stepped out of dealflow, inking just two deals so far in 2008. (We recently noted Cisco’s conspicuous absence, just a day before it announced its $120m purchase of network device configuration vendor Pure Networks.) In comparison, this time last year Cisco had inked nine acquisitions. Additionally, Cisco has drastically scaled back its share repurchase program, perhaps suggesting the company is stockpiling cash for a big deal.

Of course, most of the rumors have concerned a possible pairing of Cisco and EMC, largely so Cisco could get its hands on VMware. (EMC sports a market capitalization of $30bn.) This comes on the heels of earlier rumors that Cisco might be looking at Citrix, largely so it could get its hands on XenSource.

We have a new name to toss into the Cisco M&A rumor mill: McAfee, which has a $6bn market cap. Speculation has recently surfaced that the networking company is eyeing the largest IT security pure play, a combination that would allow Cisco – for the first time – to have control over endpoints. It would pick up a solid portfolio of security products from McAfee, notably encryption and port and device control offerings, as well as potentially salvaging Cisco’s disastrous NAC effort. (And as an added bonus with the deal, Cisco could stick it to Symantec. Cisco has little love for Symantec.)

Whether a deal materializes, or even is being considered, we would expect Cisco to emphasize security much more in the future. It recently handed the division over to Scott Weiss, who came with the January 2007 acquisition of IronPort Systems. A VC who has invested in Weiss’ companies over the years (Weiss also ran Hotmail) said he wouldn’t be surprised if Cisco turned over the entire business to Weiss when Chambers decides to step down.

Creative destruction and its discontents

In a February 2007 report, we asked an egghead question about valuations in a sector that had been ‘creatively destroyed,’ to borrow Joseph Schumpeter’s oft-used phrase. At the time, we weren’t asking for purely academic reasons. Rather, we were trying to put a price on Tumbleweed Communications following Cisco’s purchase of rival anti-spam appliance vendor IronPort Systems. (Rumors had private equity firms looking at Tumbleweed.)

It turns out we weren’t far off in our valuation. We slapped a $150m price tag on Tumbleweed; last Friday, French IT consulting firm Sopra Group said it would pay $138m in cash for the company. The deal is expected to close in the third quarter. While the companies see a bright future for the combination, we have some reservations. Specifically, we wonder how Sopra, which is making the acquisition through its Axway subsidiary, will hit its target of 12-15% operating margins for the combined company next year. (Tumbleweed has run at negative operating margins for years, piling up an accumulated deficit of $300m in its history.)

Whatever the performance of Tumbleweed under its new owners, we have to say that Sopra certainly didn’t overpay for the company, which should double its sales here in North America. At just two times trailing sales, Tumbleweed was valued at less than half the price-to-sales multiple found in comparable transactions.

Anti-spam shopping

Acquirer Target Date Price Target TTM sales
Sopra/Axway Tumbleweed June 2008 $138m $58m
Google Postini July 2007 $625m $70m*
Cisco IronPort Jan. 2007 $830m $100m
Secure Computing CipherTrust July 2006 $264m $48m
Symantec Brightmail May 2004 $370m $26m

*estimated, Source: The 451 M&A KnowledgeBase