Cisco plans to pay a total of $7.4 billion for two start-ups in a bid to beef up its lucrative optical networking business, which is aimed at the carrier rather than its traditional enterprise market.
The purchase of optical transport provider, Cerent, for $6.9 billion worth of Cisco stock is thought to be the most expensive acquisition of a privately held company in the industry to date. The networking giant will also bag optical cross connect supplier, Monterey Networks, in a stock swap deal worth $500 million.
The acquisitions will form the core of Cisco's otherwise sketchy sketchy product strategy to compete against Lucent and Nortel in the optical transport market, which analysts calculate will be worth $17 billion by 2002. Cerent and Monterey’s products enable traditional circuit and packet based traffic to be carried across modern optical networks.
Jim Slaby, a senior analyst at Giga Information Group, said the acquisitions were Cisco's "table stakes" to the optical transport market, but suggested that the vendor also needed to acquire a DWDM supplier.
He explained: "It's a good start from a product point of view. The real challenge is whether Cisco can prove it has all the things vendors such as Lucent and Nortel have."
"Cisco is good at selling to enterprises, but selling to carriers is a different game - they are big and very demanding," he continued, adding that Cisco was more likely to win over data oriented carriers such as Qwest than those coming from a voice background because they were less likely to be saturated with Lucent or Nortel kit.
Both Cerent and Monterey were established in 1997, but while Cerent claims to have 100 customers, Monterey does not expect to ship its offering until the first half of 2000.
Cerent's 454 optical transport offering sits at the edge of the network and aggregates traffic, including time division multiplexed (TDM) data, IP, ATM and video, to the core carrier network.
Monterey's Wavelength Router, however, will work within the optical core to hook up the point to point long haul optical pipes that are created by dense wave multiplexing (DWDM) technologies. The routers interconnect IP routers and switches across a ringless optical core.
Today’s move follows Cisco’s purchase last year of Pipelink, a developer of synchronous digital hierarchy (SDH) routers, and its deal with Ciena to integrate its gigabit switch router with Ciena's DWDM optical technology.
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