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Cisco spends $7.4 billion on optical push

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Cisco today announced its entry into the optical transport business in a big way by plunking down $7.4 billion to acquire privately-held Cerent of Petaluma, Calif. and Monterey Networks of Richardson, Texas.

The $6.9 billion acquisition of Cerent is Cisco's largest ever, dwarfing the $4 billion Cisco paid for StrataCom in 1996. Cerent develops SONET transport products that combine add/drop multiplexing, digital cross-connect, time division multiplexing as well as packet and cell switching. The company has more than 100 service provider customers nationwide.

With these acquisitions, Cisco is entering the optical transport market, which is expected to be a $10 billion market in 2002, the company says citing data from various analysts. The Cerent and Monterey products will accelerate the migration of service provider networks from traditional circuit-based networks to cell and packet-based networks, Cisco says.

Cerent's 454 optical transport system is the first generation of transport equipment designed around the Internet, Cisco says. It is a single platform that allows service providers to offer data and traditional voice services without investing in legacy SONET equipment, the company says.

Using this technology, service providers can accommodate rapid changes in network traffic in a matter of minutes instead of days, Cisco says.

Monterey builds optical cross-connect technology that is used to increase network capacity at the core of an optical network. The company has no announced customers, Cisco says.

Monterey's technology gives service providers the ability to quickly add capacity at the core of the network, Cisco says. Combined with Cerent, Monterey gives Cisco a "complete" SONET infrastructure offering to help service providers' transition to packet-based multiservice networks, and eventually to optical transport networks based on dense wave division multiplexing, the company says.

Cisco plans to integrate dense wave division multiplexing (DWDM) with the Cerent and Monterey products, Cisco officials say. At that time, Cisco will have a DWDM solution for metropolitan networks but will still lack a long-haul offering based on DWDM.

Cisco's partnerships with DWDM transmission companies Ciena and Pirelli are not likely to change "in the near to midterm," company officials say.

Cerent was founded in 1997 and has 287 employees. Monterey was founded in 1997 and has 132 employees. Both companies will become business units within the Transport Group reporting to Kevin Kennedy, Cisco's senior vice president of the service provider line of business.

With these acquisitions, Cisco now has 900 employees focused on optical internetworking.

Under the terms of the Cerent agreement, 100 million shares of Cisco common stock will be exchanged for all outstanding shares, options and warrants of Cerent not currently owned by Cisco. Based upon Cisco's August 25 closing price of $68.625, the stock exchanged would have a value of approximately $6.9 billion. This acquisition will be accounted for as a pooling of interests and is expected to close in the first half of Cisco's fiscal year 2000.

Under the terms of the Monterey agreement, 7.3 million shares of Cisco common stock will be exchanged for all outstanding shares, options and warrants of Monterey not currently owned by Cisco. Based on Cisco's August 25 closing price of $68.625 the stock exchanged would have an aggregate value of approximately $500 million. In connection with the Monterey acquisition, Cisco expects a one-time charge against after-tax earnings of between 7 cents and 11 cents per share for purchased in-process research and development expenses in the first quarter of Cisco's fiscal year 2000.

Both acquisitions have been approved by each company's board of directors and are subject to various closing conditions including approval under the Hart-Scott-Rodino Antitrust Improvements Act.


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