Cisco’s ClearAccess Deal Could Breathe New Life Into Routers Business

Cisco (NASDAQ:CSCO) has announced its intention to acquire ClearAccess, a privately held network management company, in a deal that is expected to bolster Cisco’s Prime service. ^[1] The financial terms of the acquisition were not disclosed; however, Cisco revealed that it is only interested in the software arm and not the hardware business, which will be spun off as SmartRG Inc.

The acquisition is expected to complete by the end of Cisco’s 2012 fiscal in July. Cisco competes with HP (NYSE:HPQ), Juniper Networks (NYSE:JNPR), Alcatel-Lucent (NYSE:ALU) and Huawei-3Com in the network equipment business. We currently have a $23.37 Trefis price estimate for Cisco, about 13% higher than the market price.

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Cisco looks to decrease network congestion

The ClearAccess acquisition will help Cisco cater to the growing needs of mobile service providers to better handle the burgeoning video and data traffic that is congesting their networks. The proliferation of mobile devices ranging from smartphones to tablets to a whole set of connected devices such as e-readers, M2M and security systems, is putting a lot of strain on wireless networks that are already constrained by insufficient spectrum.

ClearAccess’ technology will be incorporated in the existing Cisco Prime network management service portfolio to provide service providers with a set of cloud-based tools aimed at managing their overloaded networks effectively – including monitoring and managing bandwidth usage, parental controls, diagnostics and analytics – and reducing data traffic congestion.

By leveraging ClearAccess’ software, Cisco will be able to quickly create and expand its offerings in network management and advisory services. This will help increase the company’s network service revenue, going forward. In addition, helping service providers better manage their data traffic at the edge will increase the value of Cisco’s edge routers as well, driving its router business forward.

Cisco’s market share in edge routers has been declining in recent years from what was once well over 50% to about 47% currently. This move could help stem the losses in the coming years, as management of data traffic becomes even more crucial.

Network services and routers account for a combined 30% of Cisco’s total value, by our estimates.

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1. Cisco Announces Intent to Acquire ClearAccess, Cisco Press Release, March 28th, 2012 [↩]