Though not historically very active in terms of acquisitions, cloud computing hardware and service provider Arista Networks (NYSE:ANET) recently went shopping. According to reports, Arista is paying an undisclosed amount (which usually means small, at least compared to the size of the acquiring business) for software-defined network provider Big Switch Networks, beating out other potential networking hardware suitors like Cisco (NASDAQ:CSCO), Dell Technologies, and VMware

Though this purchase will barely show up on the radar as far as dollars and cents go (Big Switch has raised $120 million in investment funding since its founding in 2010, according to Crunchbase, and Arista has done $2.5 billion in revenue over the last 12 months), it's nevertheless an important one. Arista is trying to move into new territory in the cloud industry, specifically going after organizations that want to build their own private data center and cloud service for personal use. As public cloud data center buildout from the likes of Amazon's (NASDAQ:AMZN) AWS and Microsoft's (NASDAQ:MSFT) Azure matures over time, this new discipline could help Arista maintain its fast pace of expansion.

A bank of computers surrounding a cloud, illustrating a data center.

Image source: Getty Images.

If the price is right

Arista has been making inroads into the internet networking hardware industry, taking bites from Cisco's legacy out-of-the-box and not very adaptable packages by offering customizable data center and network products. The company has grown its little niche organically, save for two small acquisitions a couple of years ago.

Over the summer of 2018, Arista purchased Mojo Networks and Metamako, again for undisclosed (and likely small) sums. The former was a builder of enterprise-grade WiFi components that eliminate the need for some traditional hardware, and the latter was a specialist in field programmable chips that control the fast transfer and delivery of information within a network. Mojo Networks and Metamako were both integral parts of Arista's campus cloud (meaning private data centers for businesses) offering it started rolling out later that year.

But there is more work to be done, and Arista has expanded on its original campus cloud with additional features and capabilities that cover individual organizations' needs. Big Switch Networks thus became the company's third takeover target.

Software-defined networks matter

Big Switch is a specialist in software-defined networks (or SDN), a network architecture that allows the hardware to be programmed via applications. SDNs are adaptable and able to handle the greater workloads that are commonplace in this age of big data.

Arista has always been a software-first organization. The inherent flexibility of a hardware setup that can be customized and managed via software is one of the reasons the company has been able to grow so quickly at the expense of legacy manufacturers like Cisco. But Big Switch takes things another step, combining its software for on-premises network management with monitoring and analytics tools, and maintains a multi-cloud software director for organizations that operate on public cloud services (like AWS or Azure) alongside their own private clouds. Big Switch has been named a top "visionary" in data center networking by tech researcher Gartner for the last three years.

Arista has also consistently made the cut as a visionary in Gartner's reviews, but its larger size could help it expand Big Switch's potential just like it has with Mojo and Metamako in the last year and a half. Plus the SDN industry is a big one, covering lots of sub-disciplines and solving the needs of many businesses. Global SDN spending is expected to grow north of 20% every year for the next few years, with one estimate from Allied Market Research putting annual spending north of $130 billion by 2022.

Bridging big public cloud provider needs and smaller on-campus cloud needs will thus be essential for Arista. The bumpy results in 2019 demonstrate that as several big cloud customers adjusted their spending to adapt to slowing demand for new data center construction. Big Switch won't solve the problem of getting in on-campus cloud business all on its own, but it does underline the big changes that are starting to take place that should set up Arista for another decade of expansion.

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