Cisco looks to gain momentum in cloud communications with BroadSoft buy

Cisco is moving into familiar territory with the acquisition of BroadSoft as it looks to expand its collaboration business into the SMB market via service providers. The deal makes Cisco the largest global unified communications-a-a-service (UCaaS) provider. Prior to the purchase, BroadSoft was the biggest UCaaS vendor in terms of installed lines, with Cisco a fast-growing second. The move comes three months after Mitel announced the pickup of ShoreTel.

BroadSoft should expand Cisco's collaboration portfolio with voice and contact-center services for SMBs. It complements its enterprise collaboration business, which is based on cloud-delivered collaboration services such as HCS, conferencing services like WebEx, Spark UC tools, and on-premises phones and conferencing and collaboration endpoints. The transaction also presents an opportunity for Cisco to replace aging time-division multiplexed voice and call-center infrastructure in SMBs with its IP packet or cloud-native infrastructure.

Deal details

Cisco is continuing its software-buying spree with the $1.7bn purchase of BroadSoft, a transaction that could give a boost to the acquirer's collaboration business. According to 451 Research's M&A KnowledgeBase, Cisco has now spent $6.5bn on eight software deals so far this year. In its largest acquisition of the year, Cisco shelled out $3.7bn for application performance monitoring firm AppDynamics to stretch into a new market. With BroadSoft, it's making a conservative bet at a conservative price, valuing the target at an enterprise value of $1.9bn, or 5.4x trailing revenue, compared with 17x for AppDynamics, which it nabbed in January.

Both BroadSoft and Cisco have developed UC products for different end markets – BroadSoft for service providers (and, indirectly, SMBs) and Cisco for large enterprises. While the target's top line grew 20% to $355m trailing revenue, Cisco's collaboration business shed 2% amid shrinking hardware sales. According to a 451 Research Voice of the Enterprise survey, most enterprises have already moved at least part of their collaboration workloads into a cloud service. Nearly two out of three enterprises report that they have migrated at least some of their email, collaboration and productivity apps to a hosted or SaaS service, while 17% plan to do so in the next 12 months.

Jefferies and Qatalyst Partners advised BroadSoft on its sale, while Bank of America Merrill Lynch advised Cisco.

Deal rationale

Cisco must replace its hardware revenue with software sales. In buying BroadSoft, it is taking a step in that direction in both the business communications and call-center sectors. In addition to opening up a new market for the company's products (and bringing conferencing capabilities to BroadSoft in the form of Cisco's WebEx), the transaction gives Cisco another offering to sell to service providers that have long purchased its networking equipment.

The deal should enable Cisco to offer a broad range of collaboration products and services to organizations of all sizes, delivered in a range of consumption models – on-premises, hosted or cloud-based – from Cisco or service providers such as BroadSoft partners Verizon and AT&T. The acquirer's collaboration business was down 3% in the most recent quarter and down 2% for the full fiscal year 2017. The deal will give Cisco additional momentum as it continues to shift its business to the cloud. It should also help it expand its collaboration business in the SMB segment via service providers.

When it comes to contact-center infrastructure, BroadSoft has been a minor player in the segment. Its CC-One offering is a basic cloud-based routing engine that incorporates many of the management and operational applications for call centers – OEMed from Calabrio and Inference Solutions, and integrated with CRM platforms from Microsoft and Salesforce. Cisco also has cloud-based call-center offerings for enterprises and midmarket companies. Over the past five years, it has focused on taking market share away from a troubled Avaya. But with the market for call-center infrastructure flattening, the relationship between Cisco and BroadSoft hinges more on the ability to offer business telephony services rather than serve the call-center industry.

Target profile

BroadSoft is a cloud communications provider based in Gaithersburg, Maryland. It was founded in 1998 and went public in June 2010. According to the M&A KnowledgeBase, the company has inked a total of 17 acquisitions. It currently has 1,500 employees. BroadSoft claims partnerships with over 450 telecom carriers in 80 countries, including 25 of the top 30 globally.

The company has been successful working with service providers to support SMBs but in the past year it has shifted its strategy and updated its product portfolio to target large enterprises. In November 2016, it introduced BroadSoft Business, an integrated portfolio of cloud private branch exchange, unified communications, team collaboration and contact-center applications. Earlier this year, it announced general availability of BroadSoft Hub, a cloud service that enhances its product suite with contextual intelligence.

Competitive outlook

The competitive landscape for Cisco/BroadSoft includes UC suppliers like Avaya, NEC and Mitel's ShoreTel. UCaaS contenders include Fuze, Jive Communications and RingCentral. Another key rival is Amazon Chime, a cloud-based service with capabilities for messaging, voice calling and video conferencing that launched earlier this year.

The combined company will continue to be threatened by collaboration providers that unite communications functionality (messaging, video and voice) with file-sharing and task management functionality for a full-service, contextualized workspace. These include vendors like Slack, Microsoft (Teams), Google (G Suite), Atlassian (Stride) and Facebook (Workplace).