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Cisco buys firms for $7.4B
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August 26, 1999: 12:16 p.m. ET
Buyout-hungry Net gear leader buys Cerent, Monterey in biggest deal yet
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NEW YORK (CNNfn) - Cisco Systems, a leading maker of Internet-related computer network gear, agreed Thursday to purchase Cerent Corp. and Monterey Networks Inc. for about $7.4 billion.
The $6.9 billion buyout of Cerent -- a Petaluma, Calif.-based maker of boxes that allow data and voice to switch quickly between copper lines and fiber-optic cables -- is Cisco's biggest to date.
The systems provided by both Cerent and Monterey allow data and voice to travel as smaller packages across networks.
The two purchases mark buyout-hungry Cisco's most aggressive move into the market for sending data, voice and video on fiber-optic cables.
"Everybody understands the market in this area is consolidating," said John Chambers, chief executive officer at Cisco Systems.
"In the next two to three years there will probably be only three to five players in this area. The chances to gain or lose market share are exciting."
Chambers added that more such deals were on the way and he was looking to acquire about 10 to 15 companies per year.
The market Cerent and Monterey serve, while small and not yet profitable, is expected to grow to about $10 billion in the next few years, the companies said.
Analysts said the deals also should turn up the heat on competitors such as telephone equipment suppliers Lucent Technologies Inc. (LU) and Nortel Networks (NT).
"This will allow Cisco to penetrate more deeply what has been a traditional stronghold of old world players (such as Lucent), and that helps to explain why they're paying so much for it," said analyst Michael Cristinziano at Gerard Klauer Mattison & Co. in New York.
Cerent's only product, the Cerent 54, is a box about the size of a microwave oven that sits between the fiber-optic cable and router or other device. Using sophisticated software, it organizes and compresses the data -- whether voice, data or video -- and vastly increases the size of the pipe through which that information is sent.
While Cerent didn't come cheaply, shares of San Jose, Calif.-based Cisco Systems (CSCO) rose 1/2 to 69-1/8 shortly after the announcement.
As part of the deal, Cisco will exchange 100 million shares of common stock, worth roughly $6.9 billion, for all of Cerent's shares and options. That values each of Cerent's 287 employees at about $26 million each.
Two-year-old Cerent lost $29.3 million, or 54 cents a share, on sales of $9.92 million for the six months ended June 30.
An informal buyout deal came together in two days, after Cisco business development director Mike Volpi acted as intermediary for Cisco CEO John Chambers with Cerent CEO Carl Russo, Reuters reported, citing insiders close to the deal.
The purchase of Monterey Networks, of Richardson, Texas, is valued at $501 million, based on the 7.3 million shares Cisco is paying.
Monterey Networks makes so-called cross-connect technology that boosts capacity deep at the core of an optical network. It is now testing products with Internet service providers.
The acquisitions are another example of how Cisco's strategy has shifted in the last two years. It previously focused on technology to help its routers -- its bread-and-butter products that shuttle data back and forth on networks -- run faster.
Now, Cisco has set its sights on companies that are developing ways to transmit voice, data and video over a single network using ATM, or asynchronous transfer mode, and Internet Protocol, or IP, technology.
Nearly one-third of Cisco's 40 acquisitions, including Cerent and Monterey Networks, have been related to the convergence of voice and data networks.
Cisco, Lucent and Nortel Networks, as well as smaller data networking and telephone equipment companies, are waging a pitched battle to make gear that lets service providers, such as cable and phone companies, run voice, data and video across one network.
Such moves are rapidly expanding the size of the market Cisco is pursuing. According to Cristinziano, in 1998 it was targeting a market worth $20 billion and had about 50 percent of it. But by 2002, because it is aggressively moving into new markets, Cisco's market opportunity will be $140 billion.
The technology provided by Cerent and Monterey Networks, Cristinziano added, "is something service providers lust after, and to be able to do it over state-of-the-art high-bandwidth optical equipment makes all the sense in the world."
-- from staff and wire reports
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