Thoughts on CSCO's acquisition of Cerent
1. IMO it was inevitable that Cisco would make a high-priced acquisition in optical. First, it is a logical area for it to expand its carrier presence - Cisco will be better able to define integrated network architectures addressing voice, video, and data now that it has products addressing the layer where most carriers are doing the integration. Second, eventually, Cisco's powerful router franchise would come under threat by optical alternatives. Without strong optical capability, Cisco would be at a severe disadvantage. Third, Optical equipment is a better than $15 B market growing at 30% a year - by comparison, IP carrier data is a less than $5 B market growing at 50% a year (numbers from Dell'oro and DataQuest)
2. Cerent has a good product with great interest - particularly from emerging CLEC, ISP and alt. ISP carriers. Although it has rudimentary data switching capability and a mid-capacity SONET cross-connect, customers like Qwest, Williams and Frontier are using it as flexible Add-Drop TDM SONET Mux. This is a great market, and probably puts them more head to head with Nortel (SONET supplier of choice to the new carrier market), than with Lucent or Tellabs. Nevertheless, on a global basis, this market is too hot for any one company to completely own, and I look for all the players mentioned to gain share at the expense of international players who still control half the market.
3. Putting the threat to LU, NT and TLAB in perspective. Cisco expects to do about $300M in optical business in CY00. TLAB will do more than $2B and LU and NT will each push $4B. There is growing business in ADM, DCC, and DWDM all in both SONET and SDH formats. Furthermore, once a carrier standardizes on a SONET/SDH vendor for a particular deployment, it is next to impossible to go back and respecify a new vendor, or to insert another vendors equipment onto a loop after the fact.
4. Cerent has a 6 month lead time advantage on an integrated DCC/ADM platform with multiservice I/O. However, LU will introduce a competitve system at Telecom '99 in Geneva and NT will undoubtably also introduce this type of equipment soon. I would be more concerned about ALA, ERIC, Fujitsu, Hitachi, NEC and others.
5. As we recently went to an overweight position in CSCO, I am extremely happy the street was able to appreciate that this deal was inevitable and positive. I expect Cisco's optical business to grow at better than 100% a year through CY2002 when I believe it will be a $2B business. The deal will allow top-line growth to stay above 35%, although it will be 2-3 cents dillutive for FY00.
6. IMO this is a clear indication that Cisco has backed off on its "Conversion to IP (rather than convergence), voice will be free" rhetoric. Cerent is a TDM company. Its greatest virtue is the ability to integrate IP, ATM, frame and circuit onto a circuit-based TDM SONET architecture. In an all IP world you do not need Cerent. You would integrate SONET into a big router or go packet directly over Lamda. This $7B deal is, in a way, acknowledgement that "old-world" technologies will be with us for a long, long time.
7. I am not sure CSCO is done. Notably missing from their acquisitions was DWDM technology. There are a variety of start ups in this space, but none of them gets me very excited. We'll see what they do, they may decide to remain something of a niche optical vendor a la TLAB rather than a full line vendor like LU and NT. Or not.
BTW IMHO Elias Moosa is clueless. I have talked to him and he was singularly unimpressive. Imagine, saying Rich McGinn lacks the guts to do a Cerent acquisition! Why would LU pay $7B to get technology that it will introduce in less than 3 months? |
