Cisco's 12 acquisitions last year were the most for the network giant since the tech bubble heyday and could portend even bigger spending in 2005.

Only 13 days into the new year, Cisco acquired its first company with a $450 million acquisition of wireless LAN switch vendor Airespace last week. And analysts don't expect the network vendor to stop there. A recent trend of IT industry acquisitions and signals from Cisco that it is looking to enter new markets are among the signs pointing to more Cisco buyouts.

Observers say Cisco's acquisition focus could lean toward technologies such as protocol offload and acceleration wares, wireless LAN switching and management software platforms. Analysts also expect John Chambers to reveal some of his much-touted, but as yet unnamed, six new advanced technologies the company will target in 2005.

Cisco historically has been an acquisition ace, building its market-leading router, switch security and VoIP business lines on acquired companies' technology. Last year, Cisco acquisitions, the most since 2001, were worth a total of approximately $805 million. The company used acquisitions to enter new markets, such as wide-area storage management, and to augment its current technologies such as network security, routing and VoIP.

"We use acquisitions to enter new markets, not to acquire where have a large presence in terms of positioning," Chambers said at the company's analyst conference last month. With $3.3 billion in cash, no new market is out of reach for Cisco to buy into.

Keep 'em hanging

Chambers also has kept industry watchers hanging since he mentioned last June that Cisco soon would announce six new advanced technology areas, in addition to the six advanced technologies (non-switching and routing) it is already involved in: optical, network security, IP telephony, WLAN, storage networking and home networking. When Cisco's new advanced technologies are named, acquisitions are expected to follow shortly.

"There is a reasonable likelihood that at least some new advanced technology areas could be software-centric," said Brantley Thompson of Goldman Sachs, in a recent report on Cisco's acquisition directions. "Recent acquisitions definitely suggest this direction."

Almost half of Cisco's acquisitions last year were software-focused companies. These included Protego and Perfigo, security management and enforcement software makers; Dynamicsoft, which makes carrier VoIP management software; desktop security software maker Twingo; and network management vendor Jahi Networks.

According to Thompson, future software acquisitions and new technology areas for Cisco could include applications for managing video-on-demand services, network management software for virtualizing corporate data center resources (such as storage, processors and applications), and new software platforms for managing how carriers deliver services to business customers.

Cisco's buyout of Airespace is a good fit, according to some analysts, even though Cisco is already dominant in the enterprise wireless LAN market. Although Cisco announced its Structured Wireless-Aware Network (SWAN) architecture this year, that architecture is more expensive to deploy and less secure than technology vendors such as Aruba Wireless Networks offer, some observers say.

Acquiring Airespace "makes sense," says Jon Oltsik, a senior analyst with Enterprise Strategy Group. "Cisco has security in all their network products except wireless, where they also happen to have a dominant market position."

Oltsik says that another area where Cisco could acquire is in network integration and management services - a market it broke into last fall when it bought VoIP services company NetSolve.

Some emerging network technologies missing from Cisco's menu include traffic acceleration in data centers and on WAN router links, another industry analyst says.

"We're seeing a lot of interest in the application acceleration market," says Lawrence Orans, principal analyst with Gartner. Vendors in this market include Redline Networks, NetScaler and Crescendo Networks. Going beyond server load balancing, where Cisco leads the market, these companies' boxes offload TCP connection processing and other tasks from servers and allow for better application performance.

"If you think about what some of these companies are doing with TCP connection management, there's no reason why that can't be done in a router or switch," Orans says.

Cisco CTO Charlie Giancarlo has stated specific interest in technology for accelerating XML traffic on networks using Web services. "Where we really see ourselves going is towards full message-based routing - things like XML messages," Giancarlo says.

To that end, XML acceleration and security start-ups, such as Sarvega and DataPower, are likely targets, Enterprise Strategy Group's Oltsik says.

"Web services need network-based security, authentication, encryption as well as processor off-loading," he says. "DataPower has a bunch of real networking geniuses working on that kind of thing."

Also in the acceleration realm, Cisco could acquire companies in the WAN bandwidth optimization market, where companies such as Perabit and Expand Networks are leaders. These vendors make boxes that compresses traffic and speeds up WAN links.

"Cisco has a compression module for its branch office routers, but these newer vendors have better algorithms," Orans says. "Cisco is letting these guys into their network accounts, and it doesn't have to be that way. I don't know why they've waited to get into this market."