Understanding Cisco’s Acquisition of BroadSoft – I Think Taher Behbehani Knows Why

It’s been quite a week for analysts – four events on the dance card, and I managed to make two of them. I got to BroadSoft Connections late Sunday night, when I first heard the news from – who else? – Evan Kirstel. Was hard to believe at first, and it certainly set the tone for BroadSoft’s conference, which started the next day.

A lot of that ground has been covered, and among our circle, colleague Phil Edholm posted his UC&C take, and I urge you to give it a read. I’m more of a business strategy analyst, and will build a bit on Phil’s thoughts, along with how the whole thing looks to me. In my view, strategy is best understood by the motivating factors. The technology is important, but really, most vendors in this space have comparable capabilities, and the name of the game is about acquiring customers, keeping them, and growing the revenue base. In that context, here’s my view on both sides of the buy/sell ledger.

Why Did BroadSoft Sell to Cisco?

Wearing my MBA hat, different questions come to mind than when wearing my analyst/UC Expert hat. I’ll start with the seller, and will then flip the script as to what I think drove Cisco to this decision.

They didn’t need to sell, but they wanted to

On paper, BroadSoft is a winner. The company has been profitable every quarter since going IPO in 2010. I don’t follow Cisco’s financials, but I’d be surprised if they can match this. BroadSoft has strong margins, both gross and net – roughly 75% and 20% respectively – plus a healthy cash float of about $350M. Business-wise, they’re on the right side of the curve as carriers are trying to migrate away from switch-based legacy networks to the cloud and IP-based architectures. Nortel is long-gone, and remaining incumbent vendors like Ericsson and Alcatel aren’t nearly as far along this path as BroadSoft, so there’s plenty of runway left on this growth curve.

Based on those numbers, there’s no need to sell, especially with BroadSoft being dominant enough to have achieved arms-dealer status to the carriers. On the other hand, after building this for 19 years, perhaps the founders – Mike Tessler and Scott Hoffpauir – felt it was better to go out on top, Mary Tyler-Moore style. It’s hard to imagine their market share getting much bigger, and while the modest breakup fee of $56M makes it easy to change their mind, the time must have seemed right for them. Furthermore, being an all cash offer, the deal is clean, simple and fast. They can exit on their terms, and not get bogged down in the complexities of going the private equity route.

Of course, it’s fair to say that some shareholders are unhappy, noting that BroadSoft did not sell to a higher bidder – if in fact, others were even in the running. It’s still possible this deal could be contested, and with this unfolding so quickly, we don’t have complete information, so it’s best to move on.

Implications for the collaboration space

Most importantly, by taking BroadSoft off the market, carriers will have fewer options for independents to partner with for UCaaS. In one sense, this will drive more business to the remaining players like Genband, as well as the OTTs like Vonage, along with 8x8 and RingCentral – both of which are also in play, and will likely be next on the consolidation block. With BroadSoft having established the going rate, I’m sure the other dominoes will fall sooner than later, since Cisco’s direct competitors and aspiring competitors will now be pressed to make a move for the next-best target.

Given that Cisco paid $3.2B for WebEx, it’s fair to speculate that BroadSoft may have been undervalued given their strengths. That said, being a white label provider, they lack Cisco’s brand recognition, and I’m sure that hurt their selling price. The trade-off here is that under Cisco’s umbrella, BroadSoft will have better opportunities to sell upmarket – but of course, that depends on how the portfolio integration goes. It’s too early to tell if Cisco will keep that for themselves, and serve the mid-market and below with BroadSoft’s more adaptable offerings.

Finally, with a playful nod to Pulp Fiction, I’ll add The Bonin Situation. I’ll be writing more about keynoter Bonin Bough in another post, but I found his core message quite apt for the circumstances. What happened to Jules and Vincent during that part of the film was not planned, and the chaotic cleanup that ensued was awkward, but it all worked out. That was the vibe at Connections, since the Cisco news fell like a hammer just as the event was about to begin. Two-plus days of carefully planned roadmaps all of a sudden felt pointless, when the only thing people wanted to know was why is this happening?

Bonin Bough was new to me, and a total breath of fresh air. While rooted in the consumer-packaged goods world, he delivered very compelling messaging around what he calls “hackonomy” – creating value by breaking things to unlock greater value for tomorrow. In a sense, that’s what was happening to BroadSoft, so his timing was pretty damned good. Not only that, but his hip-hop, edgy style sure made BroadSoft look good coming into the corporate fold of Cisco. I don’t think it was planned this way, but that’s how it looked to me, with a hat tip to Tarantino.

Why Did Cisco Buy BroadSoft?

Now it’s time to explain my reference to Taher. Again, it wasn’t planned this way, but in my view, the answer to this all-important question was there for the taking in Taher’s comments during his presentation. The timing of the announcement was definitely awkward, and you can’t help but wonder if it was rushed to be done no later than the start of the conference in order to make clear to the broader market that BroadSoft was no longer in play.

Buy versus build decision, and time-to-market

These two ideas basically sum up Cisco’s rationale to me. The collaboration LOB only accounts for 9% of Cisco’s overall revenues, and despite heavy investment in Spark, it’s not a stretch to say that organic growth isn’t happening fast enough in such a crowded, competitive market. Things are moving quickly for everyone, and if you can’t keep paced based on internal efforts, acquiring someone who is already there is the next step. Cisco plays that card very well, and given how the market is evolving, $1.9B isn’t a huge price to pay to acknowledge that Plan A isn’t going to be enough.

This brings me to Taher Behbehani, BroadSoft’s Chief Digital and Marketing Officer. I really enjoyed his talk about the importance of time-to-market, and how the current innovation cycle with customers is 17 months. That’s just too long now to stay competitive, and he outlined various ways how BroadSoft is shortening this up for their customers. It’s a great way to add value, but I don’t think he intended this to apply to what Cisco needs, and why they’re acquiring BroadSoft.

Not only does this move bring a complete, fully formed cloud-based UC&C portfolio into the Cisco fold, but along with that comes the expertise of engineers and developers who build these applications all day long. That’s the engine to drive ongoing innovation to keep them competitive, and could ultimately be just as valuable as BroadSoft’s customer base. If that was Cisco’s plan, BroadSoft was the logical choice – nobody else really comes close.

This move is a textbook scenario for an offensive strategy, but there’s a strong defensive element as well. The awkward timing of the announcement may well have reflected a hasty plan that simply needed to happen as a pre-emptive strike while BroadSoft was riding high. Microsoft’s newly announced focus on Teams makes them a prime competitor across all segments of the market. Both Amazon and Google have growing ambitions for enterprise services, and could have easily outspent Cisco to snap up BroadSoft. Avaya could become a wildcard player if they emerge from Chapter 11 with a strong IPO. Then there’s the Chinese company that will-not-be-named, and while an extreme longshot, BroadSoft would certainly be a prize for them to acquire – and to keep away from Cisco.

Implications

I won’t revisit the oft-asked questions about all the integrations that come with moves like this – product mix, partners, branding, channels, chain of command, culture, etc. All of that is TBD, but you sure have to wonder what happens to WebEx, the sticky “powered by BroadSoft” tagline, as well as the inevitable overlap between Team-One and Spark. While executives from both companies talked about how complementary the product lines are, this will not be easy, especially given how BroadSoft has a clear roadmap for moving upmarket.

Perhaps more importantly, this accelerates Cisco’s overall move to the cloud, and that should help keep channels happy with less reason to go elsewhere. Once integrated, BroadSoft’s portfolio will make it easier for them to sell UCaaS and CCaaS to their customers.

Stepping out a bit further, larger carriers will be more inclined to stay with Cisco when selling downmarket where BroadSoft has more to offer than Spark. This will be good news for Cisco, but not so much for the OTT players who are trying to partner with Tier 1 carriers to serve their mid/small market customers. In this new world order, the likes of Vonage, RingCentral and 8x8 won’t be competing against BroadSoft; they’ll be up against something much bigger.

In this regard, Cisco gains a very valuable asset, and if they can make it all work, they’ll be much more effective competing in a really messy market that’s coming to be dominated by giants. However, you need to be more than just big to succeed; as Taher rightly noted, you need to be nimble and agile, and that’s what this deal really brings to the table. Of course, the market will be poorer for choice, but that’s the natural order of things, and I don’t see this creating enough backlash to ruin Cisco’s grand plan, to whatever extent it’s truly a plan. The last word, however, goes to the founders, so kudos to Mike and Scott for a fantastic run – I don’t think the market would be where it is today if not for them.