Will CSCO and TLAB run into each other as we move forward? When will TLAB have products to market?
Mike
Cisco to Buy Pirelli's Optical Unit for $2.15 Billion
San Jose, California, Dec. 20 (Bloomberg) -- Cisco Systems Inc., the world's biggest maker of Internet equipment, agreed to buy Pirelli SpA's optical systems unit for $2.15 billion in stock, filling a gap in its line of fiber-optic products.
The company also will invest $100 million in Pirelli's optical components unit and undersea cable operations, giving San Jose, California-based Cisco a 10 percent stake in each business. Milan-based Pirelli is Europe's No. 2 maker of telecommunications cable behind Alcatel SA.
Cisco's largest purchase in Europe caps a $10 billion buying spree for equipment that sends signals over fiber-optic networks. Cisco gains a product that boosts capacity by packing more data on each strand of fiber, helping the company challenge Lucent Technologies Inc. and Nortel Networks Corp. in a market that will more than quadruple to $41 billion worldwide by 2003, according to market researcher RHK Inc.
``Cisco wants to go after Lucent and Nortel,' said Walter Casey, an analyst at Banc One Investment Advisors, which owns shares of all three companies. ``This acquisition makes sense.'
Pirelli, Europe's No. 3 tire maker, said earlier this month that it wanted to sell part of its cable business to focus on more profitable areas. The company was advised by Merrill Lynch & Co. and Lazard Freres & Cie. Goldman Sachs Group Inc. advised Cisco.
Pirelli ``didn't have much of a chance of competing with the giants,' said Alfredo Fiorentini, an analyst at Metzler Capital Markets in Milan.
Cisco rose 3 9/16 to a record close of 103 1/4. Its shares have more than doubled this year. Pirelli gained 0.204 euro, or 8 percent, to 2.765.
Fiber Optic Boom
The acquisition comes a few days after Nortel, North America's No. 2 telecommunications-equipment maker after Lucent, agreed to buy Qtera Corp. for as much as $3.25 billion in stock. Nortel is gaining a product that allows phone and data traffic to be sent on fiber-optic networks over longer distances at lower cost. Cisco failed to buy Qtera after Nortel boosted its offer, people familiar with the matter said at the time.
Cisco is aiming to buy a complete line of fiber-optic products to better serve customers and maintain the 80 percent growth pace of its revenue from phone companies and Internet- service providers. Phone companies like the equipment because it's cheaper and faster than laying new fiber in the ground to handle the rising tide of Internet traffic.
DWDM Equipment
The equipment that boosts fiber capacity uses a technique called dense wavelength division multiplexing, or DWDM. It helps send separate streams of data on many different wavelengths of light, or colors, simultaneously over a single strand of cable.
``The future of communications networking is going to be more capacity over fiber,' said Michael Neiberg, an analyst at Chase H&Q, who rates Cisco a ``buy.'
Cisco's new DWDM gear will work with equipment from Cerent Corp., a startup Cisco bought in November for $7.15 billion; Monterey Networks Inc., bought in September for $500 million; and PipeLinks Inc., bought last December for $118 million. Cisco also makes a router to direct Internet traffic.
Pirelli's DWDM customers include Frontier Corp., which was acquired by Global Crossing Ltd. in September, and Deutsche Telekom AG, Europe's largest telecommunications company. The unit Cisco is acquiring is estimated to have sales this year of about $225 million. That ranks Pirelli behind Nortel, Lucent and Ciena Corp. in the market for DWDM equipment, according to Merrill Lynch.
Looking Around
It was no secret that Cisco was shopping for a maker of DWDM equipment. Cisco executives have said the company was interested in such a purchase, though it could've been a year to 18 months away. Analysts and investors speculated that Cisco would buy Pirelli's business or Ciena. Ciena shares fell 2 5/8 to 60 7/8.
``This gives us a strong European presence,' said Cisco Executive Vice President Don Listwin.
Cisco could face more difficulties integrating Pirelli's business than it has with most of the North American companies it's acquired, said Banc One analyst Casey.
``It's a different culture,' Casey said. ``That's more of a risk than the technology.'
At a press conference in Milan, Pirelli Chief Executive Marco Tronchetti Provera noted his company's lack of expertise in electronics and software.
``Alone we have weaknesses,' he said. ``Now we have gained an ally in submarine optical systems and in optical components and exited terrestrial optical systems.'
Pirelli's Profit
Pirelli had a 12 percent decline in profit in the first half of this year as margins in cables slumped. The company unveiled plans to fire more than 7 percent of its workforce, with the bulk of the 2,800 job cuts coming in the cables business.
Tronchetti Provera declined to discuss the impact of the sale on the company's profit next year, except to say that there would be one.
The Pirelli unit has 701 employees and operations in Tregastal, France; Wuppertal, Germany; and Lexington, South Carolina, in addition to Milan.
Tronchetti Provera said he expects to complete the transaction by mid-February. The purchase price will be paid as the company meets performance criteria.
The Milan company will have ``complete freedom' to retain or to sell the shares it receives from the moment they are handed over, Tronchetti Provera said. He said he expects to sell ``a good part' to reinvest the proceeds in developing other technologies and bolster the company's existing businesses.
The exact number of Cisco shares Pirelli will receive will depend on Cisco's share price when the transaction is completed, he said.
Cisco expects to take a charge of 3 cents to 9 cents a share. The company was expected to earn 25 cents a share before charges in its fiscal third quarter ending April 29, based on a First Call/Thomson Financial poll of analysts.
Dec/20/1999 16:12
For more stories from Bloomberg News, click here.
(C) Copyright 1999 Bloomberg L.P.
|
