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Should Cisco tee up Qlogic and Silver Peak?

By Brad Reese on Wed, 09/03/08 - 7:56pm.
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QLogic Investor Relations

With Cisco this year having made only a fraction of the number of acquisitions it made last year, the networking giant looks poised to pick up some more companies before the end of the year, believes RBC Capital Markets Managing Director Mark Sue, who suggests Cisco should be eyeing up storage maker QLogic and WAN acceleration company Silver Peak Systems.

According to Sue's train of thought: "Cisco mentioned 'tough comparisons' more often on its last earnings call than in recent quarters, implying that the company may be due for an acquisition to boost its long-term growth prospects. So far this year, Cisco has made only four acquisitions, implying it is behind last year's pace when the company made 11 deals. We're also approaching the three-year mark for one of Cisco's largest deals, Scientific Atlanta, which closed at a deal price of $6.9B.

"So where might Cisco be looking and where's the money flowing? Three specific areas in our view as relates to growth markets of video, storage and virtualization. One company that might fit well into Cisco in terms of size and product set may be Qlogic, in our view. Cisco has recently underperformed in the storage market and saw this segment decline in revenues by 14% YoY. In our opinion, Qlogic brings an expansive storage set in FC, iSCSI, and Ethernet with healthy gross margins near 69% and very strong operating margins."

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Mark SueSue adds: "Cisco's current CFO also has intimate knowledge of Qlogic, having been its prior CFO. Additionally, Cisco's retired CFO is on the board of Qlogic. Is a deal pending? We don't think so, although we believe it's one that would make sense. And with a market cap of $2.5B, it's a deal Cisco could easily stomach, as it has over $20B in net cash.


"Other possibilities? Perhaps privately held Silver Peak Systems, which makes high-end WAN acceleration product for the data centers and may be complementary to Cisco's current mid range products. According to our sources, some deals are off the table (i.e., EMC, NTAP, and RIMM) due to various reasons, some of which relate to customer conflicts, limited synergies, and increase in market cap."

He concludes: "All in all, we think Cisco will make several more acquisitions by the end of the calendar year as it looks to nudge its top-line growth prospects towards the upper band of its long-term projections of 12-17%."

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