Cisco pays $6.9b. for Cerent

Ever heard of a company called Cerent of Petaluma (above San

Francisco)? Probably not. The company makes equipment that combines voice,

video and data signals over a single high-speed network. It had sales of

just $9.9 million in the first six months of this year and suffered a loss

of $29.3 million.

This week, Cisco Systems agreed to pay $6.9 billion for Cerent, the

30th company Cisco has acquired since 1996. It is Cisco’s biggest

acquisition yet.

The integrated voice, video and data networking equipment market is

perhaps the hottest new market to emerge and is projected to quickly grow

to tens of billions of dollars in sales annually. For Cisco, whose

emphasis has been in computer-based networking equipment, the Cerent

acquisition is a critical strategic move to ensure the company won‘t

find itself shut out from a market dominated by Cisco competitors Lucent

and Nortel Networks.

The Cerent systems have competed effectively as they are considerably

less expensive than those from Lucent and Nortel. The huge amount Cisco

agree to pay for Cerent is justifiable, analysts said. For one, the

technology could prove critical for Cisco’s competitive position and

Cerent has an impressive list of customers, including long-distance phone

companies Qwest and Williams Communications. Also, Cerent was planning to

go public. Its market value would have been in the $5-10 billion range

after the initial public stock offering.

Cisco also made its 31st acquisition this week with the $500 million

purchase of Monterey Networks, a Texas company that makes equipment that

increases the capacity of fiber optics lines so they can handle more

telephone and Internet traffic. Cisco was an early investor in Cerent.

Michael Dell, chairman of Dell Computer also provided $30 million in

start-up capital for Cerent.

Meanwhile, IBM announced it has received contracts worth $5 billion

from Cisco Systems, including $2 billion worth of semiconductors, disk

drives and other electronic system component, as well as several billion

dollars in service contracts to maintain Cisco customers’ computer

network equipment. The strategic alliance also includes $300 million Cisco

is paying IBM for rights to use more than 300 IBM router and

switch-related patents. IBM has been a minor competitor of Cisco in the

router and switch area and the new deal will enable the two companies to

work together on developing new solutions incorporating their respective

technologies.