IN A MARKET RIPE FOR BUYERS CISCO SAYS IT'S READY TO SHOP

Vendor interested in voice, storage and optical sectors

For telecom companies looking for a bailout strategy, grabbing the attention of Cisco Systems might be their best bet. The vendor seems eager to return to its old buying habits in a market that's primed for a buyout frenzy.

“We will be in the acquisition mode,” Cisco President and CEO John Chambers told analysts last week. “While it's hard to say how many we'll acquire in any 12-month window, I would guess eight to 12.”

This year, Cisco has made only two acquisitions after buying 23 companies in 2000. While companies looking to sell were probably lobbying for Cisco buyouts before, Chambers' proclamation will likely pique interest. “When a company is for sale, they usually come to us first, and most everybody is for sale at the present time,” Chambers said.

Indeed, with no debt and more than $7 billion in cash, Cisco is one of the few telecom vendors in a position to make acquisitions. “In the telecom space, no one is as close to as solid a balance sheet as Cisco,” said Mark Lutkowitz, vice president of optical research for CIR.

Chambers' long-term goal is for Cisco to enter three more markets. He was careful not to identify the three markets but said voice, storage and optical are areas of interest.

Wireless and softswitch equipment also may be targets. In light of Cisco's intention to gain more traction with incumbent carriers rather than rely completely on its foundation of CLEC and interexchange carrier customers, Cisco likely will seek companies with existing ILEC customers such as Redback Networks.

Despite the fact that Chambers may have a tough time explaining an acquisition of Tellabs to the financial community, Lutkowitz believes it would be a brilliant move for Cisco. “It would give them that much more in the RBOCs,” he said.

Although they lack ILEC customers, Lutkowitz pointed to start-ups such as BrightLink Networks, Coriolis, LuxN, PhotonEx and White Rock Networks as potential acquisition targets. White Rock is positioning its router as a cheaper and better alternative to the aging Cerent box, which could let Cisco retain its stronghold on next-generation Sonet equipment market.

But Cisco isn't alone in its quest to add more breadth to its portfolio, nor is it the only vendor being pursued by companies looking to sell.

Companies have been begging optical switch developer Tellium to buy them, according to Harry Carr, chairman and CEO of Tellium. But Tellium has yet to make any acquisitions, as Carr seeks “companies with a real product and customer traction.”

Merger activity will really start in the first quarter of next year, once companies get 2001 behind them, Carr said. “You will see combinations of best-of-breed companies like [Tellium], Sonus, Juniper and ONI,” he said. “There is a lot of dialog going on.”

With additional reporting by Toby Weber in Chicago.