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Cisco revisits acquisition lane

The Internet equipment giant follows through on plans to buy Hammerhead Networks and Navarro Networks for up to $258 million. Two more acquisitions may be in the works.

Cisco Systems has followed through on plans to buy two companies for up to $258 million to improve its IP networking technology. And two more acquisitions may be in the works, according to a recent company filing.

The Internet equipment giant said Wednesday that it has agreed to buy privately held Hammerhead Networks for up to $173 million in stock, and Navarro Networks for up to $85 million in stock. Both deals are expected to close by the end of Cisco's fourth quarter.

The purchases were previewed in Cisco's most recent quarterly filing with the Securities and Exchange Commission in March, when it said it could pay up to $500 million for three companies sometime before September and as much as $2.5 billion for a fourth company before July 2004.

Cisco, once one of the most acquisitive U.S. companies, has seen its deal-making pace cool along with the economy. The San Jose, Calif.-based company has also been struggling to keep up with smaller rivals such as Juniper Networks and Unisphere Networks as the router giant has lagged in software development. Investments in new technologies through smaller, private companies are part of its plan to challenge the competition.

Hammerhead's software will add to Cisco's roster of cable, broadband and leased-line products. The Billerica, Mass.-based company makes technology to speed the delivery of multiple IP services such as billing and security without affecting the speed of other networked functions. Hammerhead CEO Eddie Sullivan will join the Cable Business Unit in Cisco's Network Edge and Aggregation Routing Group.

Navarro, of Plano, Texas, makes ASIC (Application Specific Integrated Circuit) chips, which are custom-designed for a specific application and improve performance over general-purpose chips. Navarro's design expertise will be used to improve Cisco's Ethernet switching technology, the companies said. CEO Mark Bluhm will join the Internet Systems Business Unit in Cisco's Internet Switching and Services Group.

The two purchases will require Cisco to take a one-time combined charge for purchased in-process research and development costs of up to 2 cents a share in fiscal year 2002.

In its March SEC filing, Cisco said it has been expensing some of its funding of the four companies as research and development costs. Of the three companies it could acquire before September, Cisco said it expensed about $29 million of its funding as research and development; for the fourth company, Cisco expensed $38 million of its funding as research and development.

If the fourth company exercised its "put option" and Cisco acquired it, Cisco would have to provide it with additional funding of up to $100 million.