Cisco's big optical networking bet

In a deal believed to be the largest sum paid for a privately held technology company, Cisco Systems bought its way into optical networking market, acquiring an optical transport company, Cerent, for $6.9 billion and an optical cross-connect maker, Monterey Networks, for $500 million. The premium for Cerent apparently was paid to equal recent IPOs such as that of Juniper Networks, which is valued at $11 billion.

Cisco intends to use the two companies as a launching pad into the growing optical networking market, which is expected to reach $17 billion by 2002, according to recent analysts' reports. "The portion addressable by Cerent and Monterey is at least $10 billion," said Mike Volpe, senior vice president of business development for Cisco. Also vying for market share are competitors such as Lucent Technologies, Nortel Networks and Tellabs.

Despite paying roughly $24 million per Cerent employee and $3.7 million per Monterey employee, Cisco still does not have a complete optical networking solution. For that, four critical elements - long-haul transmission, WAN switching and routing, metropolitan area networks (MAN) and access - must all be combined. The Cerent 454 product fills the access part by supporting multiple services and providing bandwidth management for integrated traffic. Monterey's wavelength router fills the switching and routing bill as an optical cross-connect and lets providers add capacity at network cores.

"With these acquisitions, they only have two out of four pieces of the puzzle," said Hugh Martin, CEO of Optical Networks, which develops MAN products. Cisco still must fill the long-haul transmission and metropolitan slots, he said. "But overall, it was a really smart move for Cisco."

Cisco is filling those gaps through its relationship with Ciena but will want to control the entire solution, not just parts of it, as the market grows, Martin said.

"When the metropolitan market begins to happen, there could be a potential void," said Kevin Kennedy, senior vice president of the service provider business for Cisco. "The metropolitan area would be a gap if it were a sizable market, but that is not the case right now." Completing the urgent pieces of the optical solution puzzle was at the crux of the acquisitions.

Kennedy also noted that while an acquisition of Ciena seems logical in the future, the partnership is serving them well now. Although a much younger company, Cerent has more than 100 clients, which is significantly greater than a company such as Ciena, he said.