Cisco to keep buying, despite rising prices

The networking equipment leader plans to buy 20 to 25 firms over the next year, but is wary of the rising valuations of networking start-ups.

3 min read
SANTA CLARA, Calif.--Networking equipment leader Cisco Systems plans to stick to its acquisitive strategy over the next year, but is wary of the rising valuations of start-ups in the nascent market for Internet-based optical equipment.

Despite the lofty valuations given to a number of new entrants in the networking equipment and software markets, chief executive John Chambers says the company plans to buy 20 to 25 companies over the next year.

In the past, Cisco has counted on start-ups to fill holes in its technological portfolio. Of particular interest to many in the networking industry is technology that improves the capacity and performance of fiber-optic networks but isn't overly expensive.

The cost of such a strategy, however, has risen considerably, given the recent success of upstart networking companies such as Juniper Networks, Foundry Networks and Sycamore Networks.

The values associated with the sector can best be exemplified by Cisco's recent purchase of Cerent for nearly $7 billion, despite the start-up claiming only $10 million in revenue. This week's $4.5 billion deal between Redback Networks and Siara Systems--a firm that as yet has no products and no revenue--only furthers the concern that the cost of mergers and acquisitions has spiraled out of control.

Analysts believe that Cisco has its acquisitive eye on firms that make equipment to expand long-distance fiber-optic network capacity--a technique called wave division multiplexing (WDM). But company executives say demand for such gear has yet to sweep the market, thus giving Cisco time to survey the field for the right company fit.

Cisco does have a large presence in long-distance routing, however, through sales of its GSR 12000 product.

"We don't need WDM, we would like WDM," said Don Listwin, executive vice president for Cisco, during comments made to financial and industry analysts at the company's annual strategy update here. "In the next 12 months, we have to figure out what we're going to do."

In the past, Cisco was thought to be interested in WDM provider Ciena. The company also was reportedly looking at taking a stake in Italtel, a European WDM provider. Yet the costs of such hypothetical deals are still a concern.

"It would be easier to make decisions if there were rational evaluations," Listwin said.

Despite Cisco's Cerent deal, Listwin said the firm will be unwilling to pay such lofty prices for technology going forward.

"We won't be lured into doing something irrational at this point," he said.

Regardless of high prices, CEO Chambers said Cisco will continue to grow through acquisitions. "At the present time, our strategy will not change," he said.

Chambers said his company's good reputation in the industry and role as a "white knight" allows it to evaluate a variety of companies as they grow their businesses.

"We get an opportunity to buy almost every company that comes up," he said.

Separately, Chambers also reiterated comments he made at the close of the company's last quarter concerning the impact of Year 2000-related issues.

He called the fiscal impact of the much-hyped millennium bug a "one-quarter phenomenon" and said the success of the company over the next two to three years will be based on execution, not technology issues.