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Cisco to announce European optical equipment deal

The networking giant plans to announce the purchase of the optical-based network equipment assets of European giant Pirelli tomorrow for about $2.15 billion in stock, sources say.

Cisco Systems plans to announce the purchase of the optical-based network equipment assets of European giant Pirelli tomorrow for about $2.15 billion in stock, according to sources familiar with the deal.

The San Jose, Calif.-based networking company has hoped 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 amid competition from the likes of Nortel Networks, Lucent Technologies, Ciena and several start-ups.

The move fills a hole in Cisco's strategy. Despite spending nearly $8 billion to acquire two optical-based systems companies called 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 communications providers such as Qwest Communications, MCI WorldCom or AT&T, for example.

Cisco plans to invest $100 million for 10 percent stakes in two of Pirelli's other businesses--its optical components and submarine systems division--as part of a corporate alliance, sources close to the deal said. It is Cisco's largest European acquisition to date.

Cisco executives have said they would need to fill its 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 linked to Corvis in recent days, though sources inside the companies claimed those rumors were not valid.

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

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

Pirelli's optical systems division will have close to $225 million in annual revenues over the course of the 1999 calendar year, according to sources close to the companies, and a customer base that includes France Telecom, Deutsche Telecom, 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, according to sources. 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 quadruple that capacity, according to sources.