Cisco buys Meraki for $1.2 billion: 5 reasons the deal makes sense

Cisco Systems' $1.2 billion purchase of Meraki was pricey, but necessary if the company was going to make a wireless networking play and tap into the small- to mid-sized company market. Meanwhile, Cisco's acquisition of Meraki gives it tools to battle up-and-coming Aruba Networks.

The privately held company, which has about 330 employees, has midmarket customers that Cisco can't reach. Meraki counts Applebee's, Starbucks, a bevy of school districts and state and local government customers.

In a nutshell, Meraki's technology provides Wi-Fi, switching, security and mobile device management via a centralized cloud platform. Meraki appeals to midmarket customers because they don't have to deploy more IT staff to build out their networks.

If Meraki's wares, which are a play on the bring your own device trend, sound familiar that's because Aruba Networks does something similar.

Earlier: Cisco to acquire Meraki for US$1.2 billion

On a conference call with analysts, Rob Soderbery, senior vice president of Cisco's enterprise networking group, said that Meraki will form the basis of a cloud unit. Meraki will also serve as the primary networking platform for midmarket customers. Soderbery said:

[The purchase] moves us further towards the software and cloud-based business model. The midmarket is growing faster than large enterprises and Cisco has a relatively low share. Additionally the margin and growth economics of the Meraki business and the mix of product and services fit well into the Cisco financial model. While Meraki started as a pure play wireless portfolio, we became convinced that the Meraki solution was a compelling offer. We tend to position the Meraki cloud platforms the primary networking solution for midmarket customers.

"This is not just a product technology or talent acquisition, we are bringing Meraki in as a new platform was in Cisco for cloud managed networks," said Soderbery.

Cisco executives said the Meraki price tag was justified because it was strategic. Here's how Cisco sees Meraki fitting in:

Does this deal make sense? Analysts were generally on board. Here are five reasons why the Meraki purchase makes sense.

Cisco needs the midmarket. Large enterprise is simply a slower growth business. A company like Meraki could start low and move upstream. "While WLAN gear continues to be Meraki's main product line, the company has branched into the security appliance and the switching market," said Stifel Nicolaus analyst Sanjiv Wadhwani. It was only a matter of time before Meraki snuck up on Cisco.

Wadhwani added:

Cisco lacked a controllerless product and consequently was not able to easily address the small-and-mid-sized segment, which is one of the fastest growing markets in the WLAN segment.

Meraki gives Cisco a cloud strategy. Meraki's appeal is that customers don't need IT workers to troubleshoot problems. Those issues are resolved via the cloud and that fact appeal to companies with branch offices, retail locations and large campuses. William Blair analyst Jason Ader said:

We believe Meraki’s cloud based management software is the crown jewel of the deal from Cisco’s perspective, and could be used to “cloudify” multiple products within Cisco’s enterprise portfolio in the future.

Cisco had to protect gross margins. Wedbush analyst Rohit Chopra said:

When compared to Cisco, Meraki indicated that its solutions were a third of the cost of comparable systems. In our view, Cisco could not afford to simply drop prices in a fast growing business segment without eventually harming gross margins. Cisco is attempting to lower its cost and make the company more competitive with the SMB segment, while creating a platform from which is can build a cloud based service.

Meraki has a broader platform. The company's ease of use has extended from wireless to mobile device management to switching.

Cisco can neutralize Aruba Networks. Cisco's purchase of Meraki validates the wireless local networking market. Aruba competes with Cisco in the enterprise market, but has focused on small- and mid-sized companies via its Aruba Instant product line. With Meraki, Cisco can battle Aruba better on two fronts.