Cisco to buy Andiamo, deal to close in 2004

By Ben Klayman

CHICAGO: Cisco Systems Inc., the No. 1 maker of equipment said it will buy Andiamo Systems Inc. but won't close the deal until 2004, waiting to see if the small start-up can become a top player in the data storage switch business. Cisco said the net price could be as much as $2.5 billion but the final price, based on Andiamo's sales, will not be determined until the deal closes. SG Cowen analyst Christin Armacost estimates the deal could be valued between $300 million and $1 billion.

The wide range of the deal's possible closing price will be based on Andiamo sales during a three-month period shortly before closing, and will also be based on Cisco's sales and its stock price. Andiamo's switch products are used to route information in computer networks that store and share company data. Andiamo, which started operating less than two years ago, has recorded no revenue to date and just unveiled a line of products.

Cisco is betting that privately held Andiamo's sales will take off, allowing it to grab a piece of the market, which is expected to grow from about $1.2 billion this year to $4.3 billion in 2006, the company said, citing Gartner Group data. "It's definitely incremental revenues," Merrill Lynch analyst Samuel Wilson said. "Cisco right now has two storage products ... which have been relatively ho-hum. This (deal) gets them head to head in the storage switch market, which is where Brocade (Communications Systems Inc.) and McData (Corp.) play." Merrill Lynch has advised Cisco on past acquisitions.

It is the fourth acquisition of a small, privately held firm announced by Cisco this year. Cisco President and Chief Executive John Chambers has said the company will acquire eight to 12 small to medium-sized companies this year. Alex Vallecillo, senior portfolio manager with Armada Funds, which owns Cisco shares, said the San Jose, California-based company wants to pressure competitors. "Clearly it's going to be a black cloud hanging over Brocade," he said.

However, Dresdner Kleinwort Wasserstein analyst Ariane Mahler was skeptical Cisco can become a dominant player in a competitive market already ruled by heavyweights with proven technology. She said it was time for Cisco investors to take profits and downgraded her rating on the stock to "sell" from "hold."

Cisco's stock closed up 1 cent to $14.73 in Nasdaq composite trading Tuesday. It has fallen almost 19 percent so far this year, compared with a 60 percent decline in the sector's American Stock Exchange Network Index.

Market Share

Cisco already holds an Andiamo convertible note, which will be valued at $84 million and will convert into 44 percent of Andiamo equity at closing. The deal is expected to close by April 2004, but no later than July 2004, the company said. Cisco said it cannot accelerate the timetable. With the deal, the company wants to be first or second in the market, Ammar Hanafi, Cisco vice president of strategy and business development, said on a conference call.

In 2001, Cisco signed a deal that gave it the right to acquire Andiamo, which was founded in January 2001, employs about 270 people and is also based in San Jose. Cisco said in a filing with the U.S. Securities and Exchange Commission it will provide Andiamo with an additional $100 million in funding until the deal closes.

Cisco said last month it would buy the rest of privately held Ayr Networks Inc., a maker of networking services and routing software, for up to $113 million in stock. In June, Cisco closed deals to buy two other firms for $258 million in stock.

© Reuters