Cisco (CSCO 0.44%) recently agreed to buy Fluidmesh Networks, a privately-held provider of wireless backhaul solutions, for an undisclosed sum. Wireless backhaul services "haul" data from devices, including IoT (Internet of Things) gadgets on the edges of networks, back toward a network backbone.

Cisco says Fluidmesh's technology provides "zero loss of data transfer within high-speed assets including rail, subways, public transit, and ports." It claims the acquisition will strengthen its industrial IoT business by broadening its reach across "key customer segments, partners, and end users." Cisco expects the deal to close in the fourth quarter of 2020.

A visualization of network connections across a modern city.

Image source: Getty Images.

How will this acquisition help Cisco?

Fluidmesh only generates $10 million to $25 million in revenue per year, according to Glassdoor estimates, so the acquisition won't meaningfully boost Cisco's revenue, which rose 5% to $51.9 billion in fiscal 2019.

However, the integration of Fluidmesh's technologies could strengthen Cisco's industrial IoT end market, which feeds the growth of its infrastructure, applications, and security businesses. Cisco often packages its hardware, software, and security services together in cost-effective bundles for those big customers.

As companies expand their IoT networks with more sensors, cameras, and other devices, they'll need to buy more routers and switches. Strengthening Cisco's backhaul capabilities improves the efficiency of these networks, which should boost productivity and feed more data to its software and security platforms.

Capitalizing on a cyclical downturn

Cisco's infrastructure platforms business, which generated over half of its revenue in the first half of fiscal 2020, posted annual revenue declines over the past two quarters. That decline occurred for three reasons.

First, it faced tough comparisons to fiscal 2019, when more enterprise campus and data center customers upgraded their networks. Those upgrades could be postponed even further in light of the COVID-19 pandemic.

Second, escalating macro headwinds -- including a trade war that torpedoed its Chinese business -- caused customers to postpone their upgrades.

And lastly, smaller competitors like Huawei and Arista Networks chipped away at Cisco's dominant share of the router and switching markets.

If Cisco is struggling, times are likely even tougher for smaller companies like Fluidmesh, which has just over 50 employees and is headquartered in New York City and Milan -- two cities that have been hit hard by the pandemic.

Another piece of Cisco's inorganic growth strategy

Cisco has repeatedly bought smaller companies to strengthen its existing products and expand its ecosystem. It acquired over a dozen companies in 2018 and 2019, and Fluidmesh marks one of its first purchases in the new decade.

Cisco's inorganic strategy serves three main purposes. First, the company continually reinvests its massive pile of cash, equivalents, and investments -- which hit $27.1 billion last quarter -- into its business. The Trump Administration's decision to lower taxes on repatriated cash also allowed Cisco to bring most of its overseas cash home for domestic acquisitions, buybacks, and dividends over the past two years.

Second, buying smaller companies allows Cisco to add more services to its hardware and software bundles. It also makes it tougher for rivals like Arista, which operates a smaller software ecosystem than Cisco, to gain ground.

Lastly, accumulating smaller companies across the hardware and software markets ensures that Cisco stays at the forefront of the IoT market. Cisco expects the total number of networked devices to rise from 18.4 billion in 2018 to 29.3 billion in 2023, and that growth will force enterprise and data center customers to repeatedly upgrade their networks with new hardware and software from Cisco and its industry peers.

The bottom line

On its own, Cisco's takeover of Fluidmesh might not seem significant. However, it expands Cisco's presence in the IoT market and marks a continuation of its inorganic growth strategy. Over the long term, these tactics should keep Cisco at the top of the crowded networking hardware and software market.