Monday December 20 2:07 AM ET
Cisco to Buy Pirelli Optical Unit for $2.15 Billion
By Duncan Martell
PALO ALTO, Calif. (Reuters) - Cisco Systems Inc. (NasdaqNM:CSCO - news) agreed on Monday to buy the optical networking systems business of Italy's Pirelli SpA (PIRI.MI) for $2.15 billion in stock, according to a person familiar with the transaction.
The acquisition, by the biggest maker of equipment that powers the Internet, rounds out Cisco's options for sending phone, Internet and video traffic over fast optical networks.
Cisco, San Jose, Calif., also plans to invest $100 million in cash into Milan-based Pirelli's optical component and submarine optical transmission systems business, which lays undersea optical cables, this person said.
The optical systems business of Pirelli, which also makes calendars and automobile tires, had 1999 revenue of about $225 million, employs 701 people and remains profitable.
The acquisition, expected to close within 45 to 60 days, is Cisco's first move into the market for dense wave division multiplexing, or DWDM, technology, which uses differently colored light waves instead of electronic pulses to boost the bandwidth on networks that transmit phone, Internet and video traffic.
The market for optical networking is forecast to top $40 billion by 2005, according to projections by RDK, Dataquest and J.P. Morgan.
The deal, which will be accounted for as a purchase transaction, also marks Cisco's first multibillion-dollar acquisition in Europe and is its fourth-largest ever. It will round out technology Cisco acquired in the optical networking arena when it bought Cerent Corp. and Monterey Networks Inc. last month for more than $7 billion, this person said.
It also comes as data networking and telephone equipment suppliers including Cisco, Lucent Technologies Inc. (NYSE:LU - news), Nortel Networks (Toronto:NT.TO - news) and others race to build systems that can send more data across networks faster and more cheaply.
The announcement, expected later on Monday, comes shortly after Canadian rival Nortel agreed to buy Qtera Corp., a closely held Boca Raton, Florida-based company for about $3.2 billion. Qtera to date has no sales and few customers but has developed a product that lets phone and data traffic be sent on fiber-optic networks over longer distances at lower cost.
Cisco approached Qtera about a possible deal, a person familiar with the talks said, but backed out after deciding not to match Nortel's raised offer because Qtera was not yet shipping any products and had no substantial customers.
By comparison, this person said, Pirelli's optical networking business, while in a slightly different arena, has customers including Deutsche Telecom (DTEG.DE) and France Telecom (FTE.PA).
The acquisition is typical for Cisco: if the company believes it cannot develop the technology it needs quickly enough, it uses its high-flying stock as currency to buy the technology and engineering talent it needs.
Cisco has already purchased more than 40 companies and earlier this month became both the most highly valued company in Silicon Valley as well as the third U.S. company ever to surpass $300 billion in stock market value, after Microsoft Corp. (NasdaqNM:MSFT - news) and General Electric Co. (NYSE:GE - news)
Now, though, the stakes are increasing. High-speed Internet access, through cable modems and DSL service, is becoming more widely available and the worlds of high technology and telecommunications, long separate, are colliding.
Telephone, cable and Internet service providers are investing heavily to roll out next-generation media and communications services, in large part because of the rapid expansion of the Internet.
Cisco expects to record a charge for in-process research and development in the third quarter of 3 cents to 9 cents a share, this person said. Cisco shares rose 1 13/16 to 99 11/16 on Friday on the Nasdaq market.
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