Cisco needs an end to end solution
Cisco?s incomplete shopping spree?
By Om Malik
NEW YORK. 08:45 AM EDT?It was a networking merger the likes of which Wall Street has never seen before.
Cisco Systems (nasdaq: CSCO) paid $7.4 billion for two little optical networking startups--Cerent and Monterey
Networks--with less than $12 million in combined annual
sales. The San Jose, Calif.-based networking giant?s CEO, John Chambers, was sending a clear message to rivals
Lucent Technologies (nyse: LU), Tellabs (nasdaq: TLAB) and Nortel (nyse: NT): We're gunning for your market.
Wall Street heard Chambers? war cry. Lucent dropped $1.88 a share, or 2.7%, to close at $66.38 a share while
Nortel skidded 4.5% to $43.94, and Tellabs lost 5.5% to end Thursday at $62.56. Chambers? bold move is perhaps premature since Cisco still has some gaping holes in its bid
to go after the transport equipment market.
On Wednesday, Cisco announced that Cerent and Monterey were targeted for acquisition because they provide
platforms for the rapid creation of services and offer carrier class features. Based on the closing price of Cisco stock on Wednesday, the Cerent transaction is valued at
approximately $6.9 billion and Monterey at $500 million.
These acquisitions put Cisco directly into two of the highest growth sectors of the telecommunications market,
SONET and optical cross-connects. RHK, a San Francisco
research firm estimates that the SONET market will grow more than 60% in 1999 to $7.3 billion.
The transport equipment market can be broken down into three segments:
SONET/Add-drop multiplexer (ADM), cross connects equipment and dense wavelength division multiplexing
(DWDM) equipment. By acquiring Cerent and Monterey Networks, Cisco has managed to add two pieces of the
puzzle. However, it still lacks a DWDM product.
"Cisco surely needs to find a way to add DWDM equipment to their portfolio," says Aman Kapoor, analyst with
RHK, which tracks the telecommunication and networking industries.
RHK estimates that the demand for DWDM transmission equipment in North America alone will grow from $1.9
billion in 1998 to $3.2 billion in 2002, an overall growth of $1.3 billion, or nearly 70%, over the next four years.
Lucent and Nortel are very strong players in DWDM space. In fact, Nortel gets a major chunk of its $3 billion in annual optical networking equipment sales from the DWDM alone.
RHK data show that the demand for transport equipment is reflected in the strong demand for SONET-related hardware.
The SONET market will grow 46% in 1999 to $7.3 billion from $5 billion in 1998. SONET growth fuels the digital
connect systems (DCS) market, which is estimated to grow 8% to $2.9 billion in 1999. A research report issued
by Goldman Sachs shows that these trends could benefit Nortel, and perhaps Ciena (nasdaq: CIEN) and Tellabs.
In order to compete aggressively with its rivals, Cisco will have to make some quick acquisitions in order to offer
end-to-end solutions to its customers and to tap the full
potential of the market. The good news is that the company will not have to look very far.
Cisco has investment in DWDM-equipment related startup Corvis. In addition, Cisco has investments in other
startups: Optical Networks, which makes wavelength division
multiplexing equipment, and Tellium, another cross-connect equipment company.
If Cisco can manage to complete its product offering and integrate it as an end-to-end solution, the company will
prove a formidable rival to Lucent and Nortel. Otherwise, the $7.4 billion shopping spree might seem like money ill
spent. |
