Cisco taps Pirelli for optical technology

The deal, as previously reported, comes as the San Jose, Calif.-based networking company continues to bolster its efforts to gain a greater share of the market for telecommunications equipment.

The technology made by Milan, Italy-based Pirelli's optical systems business will allow Cisco to better compete with rivals Nortel Networks, Lucent Technologies, Ciena and several start-ups.

The move fills a hole in Cisco's strategy. Despite spending nearly $8 billion recently to acquire two optical-based systems companies Cerent and Monterey Networks, Cisco has lacked technology that can zip voice and data traffic across a fiber-optic line that stretches across vast distances. Such equipment is important for national communications providers such as Qwest Communications International, MCI WorldCom or AT&T, for example.

Optical-based technology has been the subject of frenzied interest among networking firms in recent weeks.

Cisco executives said the move was intended to accelerate the deployment of high-speed, or "broadband," networks.

"We were looking for an early stage company, not a start-up," said Don Listwin, executive vice president for Cisco, during a conference call this morning. "Now we have some choices."

Cisco plans to invest $100 million for a 10 percent stake in each of Pirelli's other businesses--its optical components and submarine systems division--as part of a corporate alliance. It is Cisco's largest European acquisition to date.

In Cisco's fiscal 1999, 28 percent of its revenue originated from Europe.

The $2.15 billion stock deal is partially based on the Pirelli business hitting certain revenue targets and performance milestones, according to the companies. The deal is expected to close in the third quarter of Cisco's fiscal year 2000, and will result in a charge per share of 3 to 9 cents in the third quarter, according to Cisco executives.

The boards of directors of both firms have approved the deal.

Cisco executives have said they were looking to fill long-haul optical equipment needs within the next 12 to 18 months. The Pirelli technology allows a communications company to expand the capacity of its fiber-optic networks, essentially letting it add line capacity as needed.

The ever-acquisitive Cisco had been rumored to be interested in Corvis recently, though sources inside the companies claimed the talk was not true.

Rival Nortel bought start-up Qtera, which makes similar equipment, for $3.25 billion last week.

Pirelli's optical systems division will have close to $225 million in annual revenue over the course of the 1999 calendar year and a customer base that includes France Telecom, Deutsche Telekom, Brazil Telecom and Global Crossing, among others.

The optical equipment unit of Pirelli, consisting of about 700 employees, is in its "early phases" of development as a business. It has offices in Italy, France, Germany and South Carolina.

Pirelli's optical systems business currently sells equipment that can split a fiber-optic line into 32 channels, or "wavelengths," but has demonstrated technology with nearly four times that capacity.

Separately, Cisco is part of a group investing $90 million in network-oriented consultants Enterprise Networking Systems as part of a second round of funding. The investment represents an extension of an ongoing alliance Cisco has with the Redwood City, Calif.-based firm.