Spring 2023: Cisco and Twilio

Deal Team

Rohith Gudati

From: Bridgewater, NJ

Indiana University, Kelley

School of Business | Class of 2026

Majors: Finance and Political Science

Tanish Gandhi

From: Monroe, NJ

Indiana University, Kelley

School of Business | Class of 2026

Majors: Finance and Accounting

I. Executive Summary

Executive Summary

Overview

Scope of Proposal

Strategic Assessment

• Cisco Systems, headquartered in San Jose, CA, is a multinational technology company that designs and sells networking, cybersecurity, and collaboration solutions

• The company is expanding its presence in network security domain, and continues to expand their operations in wireless technology

• Cisco’s historical performance of consistent organic growth, optimistic financial outlook, and history of small to midsized acquisitions make them a great candidate to acquire Twilio

• FIR would like to recommend that Cisco Systems, Inc. (Cisco) acquire Twilio Inc. (Twilio) to expand its cloud communications capabilities and strengthen its position in the cloud communications market. This proposal will cover the strategic acquisition of Twilio and the benefits it can provide to Cisco.

• Cisco is a leading provider of networking and communication solutions, while Twilio is a cloud communications platform that enables developers to build and deploy communication applications. By acquiring Twilio, Cisco can expand its cloud communications capabilities and enhance its offerings for developers and customers.

• Compared to Cisco’s competitors in the cloud space, they are far behind in terms of user interface APIs. This puts them in a strong position to acquire a cloud-based communications API platform.

• Cisco has penetrated the cloud communications and AI market due to sizable investments and acquisitions into security, management, and application-based companies.

• We believe this deal will be mutually beneficial; Cisco will gain access to new product offerings and market, while Twilio will be able to expand its product offerings to Cisco’s advanced cloud capabilities.

Proposal

Given Cisco’s market placement, Financial Investment Review recommends the acquisition of Twilio at an offer price of $73.14 per share and an implied equity value of $13.4B completely financed through cash, given their current balance sheet showing $20B cash on hand.

II. Company Overview

Company Description

• Cisco Systems Inc. is an IP-based networking company offering hardware/software products and services to internet providers, companies, commercial users, and individuals

• Cisco is rapidly expanding its presence in network security domain. The company offers identity and access, advanced threat, and unified threat management solutions. The company has introduced Secure Remote Worker, which leverages Zero Trust Architecture, combined with robust endpoint security portfolio of AnyConnect, Umbrella, Duo and AMP for Endpoints.

• Cisco provides Next-Generation Network (NGN) Routers, that transport data, voice and video information from one IP network to another. Collaboration products integrate voice, video, data and mobile applications on fixed and mobile networks. Key products are Unified Communications and Cisco TelePresence Systems products.

• The company’s wireless technology includes networking products: wireless LAN controllers, wireless integrated switches and routers, wireless management software, wireless LAN clients and client software, bridges, antennas and accessories.

• Cisco has pioneered a network system called the Unified Computing System (UCS). This blade server system based on x86 architecture is transforming data centers as it lowers the cost of ownership by making the entire data center more network-centric, significantly reducing the number of servers required.

• Cisco has inked strategic alliances with most of major technology companies globally. The company has strategic partnerships with Apple, IBM, Microsoft, Viacom, Telenor, Google and Alibaba, which are expected to aid the company in enhancing business opportunities. Cisco’s integration with Microsoft Azure Virtual WAN and Office 365 has prepared it to deliver highly secure end-to-end connectivity and better application performance.

• Cisco’s focus on wireless carriers has increased of late, as evidenced by acquisitions such as Intucell, BroadHop, and Cognitive Security. With data demand exploding, the wireless carrier segment has grown in importance. Mobile carriers in the U.S. are increasingly looking to make their networks more spectrum-efficient and put their network resources to use without having to materially increase capex expenditure. Therefore, networking solutions that allow carriers to manage traffic efficiently are to become increasingly important in the coming years.

Company Overview

Financial Summary (USD, in mm)

Total Revenue: 53,161.0

EBITDA: 15,811.0

EBIT: 14,130.0

Net Income: 11,302.0

Capital Expenditures: (591.0)

Market Capitalization: 192,626.6

Total Enterprise Value: 180,522.6

Cash and ST Investments: 22,061.0

Total Debt: 9,957.0

Total Assets: 38,515.0

Stock Performance (NASDAQ:CSCO)

February 2017: Cisco launched a cloud-based secure internet gateway called Cisco Umbrella, to provide safe internet access to users who do not use their corporate networks or VPNs to connect to remote data centers

May 2018: Cisco acquired AI-driven business intelligence startup Accompany for $270 million

October 2019: Cisco introduced SiliconOne, which was the first unified silicon architecture built for web scale provider and service provider networks

March 2020: SVP and GM of Enterprise Networking David Goeckeler left to become the CEO of Western Digital Corp

July 2021: Cisco announced all employees the option to work remotely on a permanent basis

March 2022: Cisco curtailed sales of its equipment in Russia due to the Russian invasion of Ukraine

October 2022: Cisco announced a partnership adding the Microsoft Teams app to its meeting devices.

II.CompanyVisionandGoals

Company Vision and Goals

Optimized Application Experiences

• Cisco's goal of optimized application experiences is to ensure that users have the best possible experience when using applications on their networks. This involves ensuring that applications are running smoothly, quickly, and without interruption, as well as providing visibility and control over application performance.

• Cisco achieves this goal through various technologies such as network optimization, traffic management, and application performance monitoring. By optimizing application experiences, Cisco aims to improve productivity, reduce downtime, and enhance user satisfaction.

Secure and Agile Networks

• Cisco's goal of Secure, Agile Networks is to provide organizations with a network infrastructure that is both secure and flexible.

• This involves implementing security measures to protect against threats, while also enabling fast and efficient communication and collaboration among users and devices.

• By combining security and agility, Cisco aims to help businesses optimize their network performance and stay ahead of evolving security threats.

Hybrid Work

• Cisco's goal of hybrid work is to enable employees to work in a flexible environment that combines both remote and on-site work. This involves creating a seamless and secure network infrastructure that allows employees to connect and collaborate from anywhere, while also providing a consistent experience across all devices and locations.

• Cisco achieves this goal through various technologies such as video conferencing, collaboration tools, and secure remote access. By embracing hybrid work, Cisco aims to increase productivity, enhance work-life balance, and attract and retain top talent.

Capabilities at the Edge

• Cisco's goal of Capabilities at the Edge is to enable organizations to leverage the power of edge computing by bringing computing capabilities closer to where data is generated and consumed.

• This involves providing networking solutions that can support a range of devices and applications at the edge, while also providing secure and reliable connectivity. By leveraging edge computing,

• Cisco aims to help businesses improve their operational efficiency, enhance their customer experience, and gain valuable insights from their data in realtime.

Macroeconomic Analysis

• Current inflation rate is at 5% but is expected to increase after likely rate reversals during 2H23

Outlook

• Fed funds rate is at 4.83 currently, and is expected to hike to 5.00-5.25 in May, before decreasing by the end of the year

• US Real GDP has increased the past two quarters rising 3.2% and 2.6% respectively

Trends

• The TMT Index was valued at 7,700 points at the start of the pandemic, before eventually shooting up to 11,500. It has since dropped down to 8,400 indicating the volatility in tech.

• TMT firms have recently been laying off employees, which could hinder short-term innovation.

• Treasury rates have consistently increased after the COVID-19 pandemic, and they are currently at 3.52

Opportunities

• In 2022 API are increasingly being used in third party applications and Cisco wants to be able to integrate their services to third party users.

• Twilio will further Cisco's development in the market of API integrations

• Twilio will also integrate well with Cisco's current market for cloud communications

Industry Analysis

Enterprise Network Infrastructure Market Size, Share, and Revenue

• The enterprise network infrastructure market was valued at $58.77B in 2022 and is expected to grow of 4.9% for the next seven years

• This market is expected to reach a size of $86.02B in 2030

• Cisco currently holds a 41% market share, being by far the largest enterprise network infrastructure vendor

Technology Industry Key Statistics

• The U.S. tech industry was estimated to reach a market value of $1.8 trillion by the end of 2022.

• The U.S. tech market accounts for 35% of the total world market.

• The U.S. tech industry is expected to grow by 5.4% in 2023.

Cloud Communication Trends

• The global cloud communications platform market is likely to garner USD 51.37 billion by 2030, growing at a 19.82% CAGR throughout the period 2023-2030.

• The cloud communications platform market is catching up with substantial momentum, with the increase in remote working facilities.

• Evolving cloud technologies have completely transformed the commercial communications space, allowing for more freedom to the staff across the organization.

Customer Engagement Software

• The global Customer Engagement Solutions Market is expected to reach a market valuation of $32.2 billion by the end of 2027, accelerating at a CAGR of 10.8% over the forecast period (2022 to 2027).

• Customer engagement solutions help reduce the churn rate which is one of the main driving factors in the industry growth

• Organizations are dealing with this change in customers' behavior by adopting multiple engagement platforms, primarily to automate their processes.

VI. Strategic Recommendation

Strategic Recommendation

• TwilioInc.(NYSE:TWLO) isacloud communications platform that allows developers tobuild and integrate various communication channels, including voice, messaging, and video, into their applications.

Twilio General Overview

• The company operates globally, with 22 data centers across nine regions. Twilio uses Amazon Web Service (AWS) to host its platform,which is already integrated in Cisco’s products.

• The company boasts a strong clientele which includes the likes of Uber, Facebook, Home Depot, Nordstrom, Netflix, Salesforce and Twitter among others. The company ended 2022 with more than 290,000 active customers.

• Twilio delivered revenues of $3.83 billion in 2022, up approximately 35% from full-year 2021. The company generates majority of its revenues from customers located in the U.S. In 2021, these customers accounted for approximately 66% of Twilio’s total revenue, while the remaining 34% was contributed by customers located outside the country.

Strategic Recommendation

Financial Highlights

Visionary Goals

Key Technologies

Customer Data Platform

$3.83B EBITDA $276.4M

Total Revenue

EBITDA, % Margin 7% Net Income -229.42M

1. Democratize Communication – Aim to make communication for businesses accessible and affordable for all

2. Enable Contextual Communication

– Developing technologies such as artificial intelligence and machine learning to help business efficiency

3. Increased Financial Performance –20%+ long-term non-GAAP operating margin target

• Flex – Builds and manages contact centers on the cloud

• Engage – Engages customers across multiple channels

• Segment – Collects and unifies customer data

Engagement Cloud Offerings

• SendGrid – Cloud based email platform that allows businesses to send and manage marketing and transactional emails (provides email API integration)

Artificial Intelligence

• Autopilot - Conversational AI platform that allows businesses to build chatbots and voice assistants

Strategic Recommendation

• Cross-Selling Opportunities: According to Twilio’s most recent 10-K and investor day presentation, 87% of their sales were from cloud communications API software. This makes it a prime acquisition target for Cisco, as they can integrate these APIs into their existing cloud software, which is more networking and security focused instead of communications focused, which will make it more attractive to customers.

Revenue Synergies

• New Customer Acquisition: Twilio’s platform has historically been used by over 5 million developers and 150000 companies, and currently has more than 290,000 active customer accounts. These customers include a variety of notable clients such as Airbnb, Lyft, and Uber, with this customer base growing each quarter. Acquiring Twilio would add to Cisco’s already large customer base.

• Product Innovation: By acquiring Twilio, Cisco can expand from the current product line, which is extremely hardware focused (75% of revenue) and integrate Twilio’s cloud services. These services include Twilio’s SendGrid which is a cloud-based email service that adds email capability to Twilio’s offerings, and Twilio’s Autopilot, which is a conversational AI platform, which is strategic for Cisco, as they have expressed interest in adding artificial intelligence to many of their products in their latest 10-K.

Cost Synergies

• Overlapping Functions: Both Cisco and Twilio have similar functions such as sales, marketing, research and development, and customer support. Combining these functions could reduce expenses and streamline processes. Headcount reductions could occur because of the similarities in technologies. Furthermore, this acquisition will allow the merged entity to achieve economies of scale in procurement, manufacturing and distribution.

• Reduction Production/Overhead Expenses: The combined entity of Cisco and Twilio could reduce overhead expenses such as rent, utilities, and IT infrastructure by consolidating their operations and eliminating redundancies. According to research firm Cowen and Company, a Cisco-Twilio acquisition could potentially achieve cost savings of up to $400 million per year through reducing operating expenses and consolidating facilities.

Potential Concerns & Mitigations

• Twilio over the past 3 years has had extremely net profit numbers and its stock has fallen substantially. There is a chance that its recent acquisitions and ambitious expansion efforts do not pan out due to macro headwinds and increased competition

• Twilio's success has been driven by its cloud-based communication platform, and if there were any disruptions to the platform or if it were to become outdated, it could have a negative impact on the acquisition's success.

• The cloud communications industry is highly competitive, and Cisco would face competition from other established players as well as new entrants to the market.

VII. Valuation

Comparable Companies Analysis

Comparable Companies Analysis

Football Field Analysis

VIII. Strategic Alternatives

Strategic Alternatives

IX. Appendix