Cisco spends $7.4 billion on two optical startups

Cisco spends $7.4 billion on two optical startups
SAN JOSE, Calif. — Cisco Systems Inc. bought its way into the optical transport field in unprecedented fashion Thursday (Aug. 26), paying $6.9 billion for Cerent Corp. (Petaluma, Calif.), and $500 million for Monterey Networks Inc. (Richardson, Texas).

The combined $7.4 billion in common stock Cisco paid for two startups indicates not only the strategic role of packet-over-optical technologies in future networks, but the radically altered role of equity at the end of the century.

Less than four years ago, Cisco paid $4.3 billion for StrataCom Inc., a packet-switching company with years of product shipments and a global customer base. In the intervening period, Cisco has paid larger and larger amounts for companies still in gestation period.

While Cerent has grown to 287 employees based on shipping products in the field, and had filed for an IPO, it was still recording losses of $29.3 million on $9.9 million in revenue in its first half of the fiscal year. Monterey is still private and relatively young, founded in July 1997. Employment is up to 132 people, and the company had just shown prototypes at Supercomm, with no shipments anticipated before early 2000.

Cerent represents a link to an earlier time-division multiplexed optical world — the Synchronous Optical Network, or Sonet. Cerent's 454 Transport System was aimed at competitive local exchange carriers, offering them an efficient way to map voice and data services, including switched Ethernet, over Sonet backbones.

Monterey represented a leap to a future world of native optical transport. Its Wavelength Router and unique WaRP protocol went beyond the passive wavelength-division multiplexing (WDM) technology of segmenting wavelengths, and offered active routing and cross-connect of wavelengths, used with or without Sonet transport.

Growth by acquisition

Cisco made clear its interests in optical networking in late 1997, when it worked with Ciena Corp., a Linthicum, Md., pioneer in WDM equipment, to found the Optical Internetworking Forum, an industry group exploring unique protocol stacks such as packet-over-Sonet and packet-over-wavelength. Cisco considered purchasing Ciena in early 1998, but was beaten out by Tellabs Inc. (Lisle, Ill.).

The Tellabs-Ciena merger fell through last fall, but Cisco's interests since then turned more to active optical network elements instead of passive WDM. Cisco's acquisition of PipeLinks Inc. in 1998 gave the company its first enterprise-level involvement in packet over Sonet, and its acquisitions of SkyStone and StratumOne Communications added chip-level Sonet interfaces to the mix. Cisco made a minority investment in Monterey earlier this summer, and was an initial investor in Cerent.

Kevin Kennedy, senior vice president for carrier services at Cisco, said that the combination of the two companies in conjunction with earlier acquisitions gives Cisco a full suite of optical products for both local and long-haul carriers. The competitive base may be impossible to predict, Kennedy said, because systems from Tellium Inc. have not arrived in the market, and it is unclear how Ciena will use its acquisition of LightEra Communications Inc.

Cisco will create a new transport group within carrier services, and Monterey and Cerent will be organized as business units within that group. Kennedy predicted the combination of optical acquisitions within that group could be as significant as the combined strength of Grand Junction Networks Inc., Kalpana Inc., and Crescendo Communications Inc. turned out to be for Cisco in the high-speed LAN arena. Cerent president Paul Russo and Monterey president Joe Bass will report directly to Kennedy.