DESPITE NO ANNOUNCED BUYS, CISCO SOWS INVESTMENT SEEDS

For many struggling vendor start-ups, Cisco Systems' plan to buy as many as a dozen companies this year represents an ideal bailout scenario. Although Cisco has yet to make a move, the equipment giant last week acknowledged plans to buy four companies soon amid significant investor speculation.

In an SEC filing, Cisco revealed it has invested in four companies in the development stage to the tune of $80 million, with commitments to fund them with an additional $62 million. The filing also stated that Cisco has options to buy any of those companies should they reach their financial targets. Cisco plans to pay as much as $2.5 billion in stock for the remainder of one of the companies — identified as storage networking firm Andiamo Systems by Cisco sources — and $500 million total for the rest of the other companies in the next six months.

Cisco declined to name the other three companies, but Calix, a voice and data networking company that will be in stealth mode until the second half of this year, has been mentioned as a possible takeover target because Carl Russo, Cisco vice president of optical networking, is chairman of the Calix board. But Calix doesn't have a financial connection with Cisco, according to a source close to Calix. Russo also holds positions on the boards of wireless services equipment maker MobileSys and storage company Kuokoa Networks.

Cisco CEO John Chambers announced late last year that his company plans to buy eight to 12 companies during 2002 to fill portfolio gaps or — in typical Cisco style — capitalize on industry segments that have yet to fully blossom.

“They like to buy out little companies working on emerging technologies,” said Doug McEuen, senior analyst for Pioneer Consulting.

Indeed, rumors of Cisco acquiring Ciena — a long-haul optical vendor trying to complete an acquisition of ONI Systems — circulated last week among stock and bond traders. But no one would verify the speculation, according to David Gross, senior analyst for CIR.

“But it would make a wonderful combination with the leader in the core router market, the leader in the next-generation metro platform and the leader in optical switching,” Gross said. “There is certainly good reason for the combination, and it's a huge gap in Cisco's [portfolio].”

With Ciena's stock price at less than $10, a market cap of $3 billion, money in the bank and a customer base that includes AT&T, Cisco may find the vendor more attractive than private companies. The rumors boosted the stocks of both Ciena and ONI Systems. A Ciena spokesman would not comment on the speculation.

Softswitch start-up Sonus Networks also saw its stock price inflate after rumors surfaced that Cisco might buy it. While most large vendors are staking claims to softswitch technology, Cisco has yet to do so. But that's for a good reason, according to Gross. Cisco supports voice over IP, but it has not provided telephony circuits in its equipment.

“I'm not sure they need to be in that business,” Gross said.