Cisco to Acquire Pirelli DWDM Unit for $2.15 Billion
By: Erik Kreifeldt
With the acquisition of a dense wavelength division multiplexing (DWDM) product line, Cisco Systems Inc. (San Jose, CA) plans to offer service providers a complete portfolio of products for optical Internet networks. In addition to maintaining open interfaces that will allow the equipment interoperate with other vendors systems, Cisco also plans to integrate DWDM into existing products, reducing the number of network elements required to build an optical Internet network. In this way, Cisco hopes to serve both incumbent carriers with open systems and individual network elements as well as new carriers with an end-to-end package of equipment.
Cisco plans to acquire the optical systems business of Pirelli S.p.A. (Milan, Italy) for $2.15 billion. Cisco is also making a $100 million investment in Pirelli's optical components business and submarine optical transmission system business, for which it secures a 10% stake. With the Pirelli acquisition, Cisco completes its line of optical service provider equipment and expands its international presence. The acquisition marks Cisco's first entry into the DWDM market and its first multi-billion dollar acquisition in Europe.
Armed with DWDM, Cisco claims to have the most complete service provider platform for Internet protocol networks. The portfolio includes Cisco's own 12,000 series IP routers and products from previous acquisitions, including the Cerent 454 multiservice metro access and transport products and Monterey wavelength cross-connects. After it acquired Monterey and Cerent, customers encouraged Cisco to round out its portfolio with DWDM products, executives say.
Pirelli is very much the pure play DWDM system provider, and the market leader in supplying systems with open OC-192 interfaces, say Cisco executives. Pirelli was the first vendor to offer 10 Gb/s transmission systems with open interfaces, and claims to have the largest installed base of the equipment. The current customer base for the Pirelli platform acquired by Cisco is roughly evenly distributed between North America and other parts of the world. Pirelli's DWDM business doubled in 1999, and Cisco expects to maintain that pace of growth. Pirelli's marquis customer is the Frontier legacy of Global Crossing. Deutsche Telekom is another major incumbent customer. Cisco hopes to pick up market share, citing a number of bids from green-field carriers with rapid deployment schedules.
In the near term, Cisco plans to integrate Pirelli's open system both with equipment in existing networks and with other gear in Cisco's product line for end-to-end solutions. In the longer term, Cisco executives suggest that they will integrate DWDM directly into the Cerent products and the 12,000-router products. With the wave router, Pirelli system, the Cerent 454, add 12000 routers, Cisco maintains that a green-field carrier can build an entire end-to-end IP network with a multi service edge. The revenue from the number of those scenarios that prove out in next 12 months will dominate the success of the acquisitions, Cisco executives say.
Most of the green-field opportunities that Cisco believes will dominate growth seek to build long-haul and regional networks, which are well-served by Cisco's acquired base of products, executives say. As for ultra-long haul opportunities being pursued by Qtera (soon to be acquired by Nortel) and Corvis, Cisco executives say that supply contract decisions are a year away, which leaves time for Cisco to gain market share. Pirelli says it has ultra-long haul optical transport technology in its research labs, and plans to have systems ready for lab trials early next year.
Although Pirelli is keeping its components and undersea businesses, Cisco intends to leverage its stake in those businesses toward a strategic partnership that makes Pirelli an attractive source of components for the Cisco DWDM systems, and in turn makes the Cisco DWDM systems a likely part of Pirelli's undersea systems supply chain. Cisco does not plan to maintain a sole, captive supply of optical components, executives note. Cisco plans to leverage Pirelli's European presence toward deployments of the Cerent 454 platform outside of North America, as well as accelerate deployment of the Pirelli DWDM system with North American Cerent customers.
In acquiring Pirelli instead of a start-up, Cisco gains all of the benefits of an early stage company without the pitfalls, company executives say. In addition to technology, Cisco secures an international distribution channel and customer support infrastructure from Pirelli that would not have come with a start-up company.