& cplSiteName &

Cisco's Creative Andiamo Options

Light Reading
News Analysis
Light Reading
8/23/2002
50%
50%

As details emerge of Cisco Systems Inc.'s (Nasdaq: CSCO) plan to "acquire" Andiamo Systems Inc., it's clear that Andiamo was effectively a dummy company established to provide unique stock-option incentives -- which Cisco says could be worth as much as $2.5 billion in total -- to a small group of executives and engineers (see Cisco Buys Andiamo).

Cisco's entrance into SAN switching is obviously a good thing for the industry as a whole. Armed with the Andiamo switches, Cisco is poised to seriously shake up the status quo in the Fibre Channel switch market, which is currently dominated by Brocade Communications Systems Inc. (Nasdaq: BRCD) and McData Corp. (Nasdaq: MCDTA).

But its unorthodox arrangement with Andiamo continues to raise questions about why Cisco felt it was necessary to structure the deal the way it did. Why did Cisco form a separate company at all? Why were ordinary Cisco stock options not good enough incentives for those employees?

The answer, as best we can determine, is that Cisco was deeply concerned about losing certain top-flight execs unless it came up with some kind of alternative compensation scheme, seeing as Cisco's stock price had fallen precipitously from its mid-2000 highs. At the same time, Cisco was very likely finding it difficult, if not impossible, to recruit elite Fibre Channel engineers unless they too were given potentially lucrative stock options.

In a roundabout way, Cisco has said as much. The structure of the deal "allows Cisco and Andiamo to balance both the risks and rewards of new market entry, while preserving the benefits of an entrepreneurial venture," Ammar Hannafi, VP of strategy and business development, told analysts and reporters in a conference call Tuesday.

By "benefits of an entrepreneurial venture," we think Hannafi means "multimillion-dollar, dotcom-style stock payout."

Cisco has finally confirmed that it is the exclusive investor in Andiamo, a connection first reported by Byte and Switch more than a year ago (see Cisco’s Secret SAN Strategies Revealed). The supposedly independent, privately held startup has not received a penny of funding from any other entity or individual. To date, Cisco says it has invested $74 million in Andiamo through convertible debt, out of a total of $84 million in promised funding. That investment (plus an additional $100 million pledged through the closing of the Andiamo acquisition) gives Cisco about a 44 percent stake in the venture.

Who owns the other 56 percent of the "startup"? Cisco says that ownership stake consists entirely of Andiamo stock options granted to Andiamo's 270 employees, as well as to 37 Cisco employees who have been "seconded" to the Andiamo project. This means that those 37 Cisco staffers are technically employed by Cisco, but they work full-time for Andiamo.

Andiamo means "let's go" in Italian, and it's been rumored that several senior Cisco executives were threatening to tell Cisco just that unless they received some kind of special compensation. According to this theory, Cisco structured the deal for Andiamo to make sure these executives -- which supposedly included Mario Mazzola, Cisco's chief development officer -- stayed in the family.

A Cisco spokesman says that neither Mazzola nor any other Cisco officer or board member has any financial interest in Andiamo. Only Andiamo's employees and the Cisco employees seconded to Andiamo do, the spokesman says.

In that case, who is going to hit the jackpot, if and when Andiamo's switches start beating the pants off Brocade and McData? (See Cisco's Sales Strategy Unclear.)

Cisco is still being extremely secretive about who Andiamo's employees are. The only ones it has publicly named so far are CEO Buck Gee and VP of marketing Jacqueline Ross. Cisco representatives said Gee was not available for an interview, and they declined to identify any other members of Andiamo's management team.

Gee was previously VP of marketing at Com21 Inc. (Nasdaq: CMTO), a cable modem maker. Prior to joining Com21 in November 1994, he was employed by -- guess who? -- Cisco, which in 1993 acquired the company he was working for at the time, Crescendo Communications. Mario Mazzola, incidentally, was president, CEO, and founder of Crescendo. Ross, meanwhile, previously served as VP of marketing at Marimba Inc. and Check Point Software Technologies Ltd. (Nasdaq: CHKP).

Cisco did tell us that Andiamo has hired engineers from Brocade, EMC Corp. (NYSE: EMC), Hitachi Data Systems (HDS), IBM Corp. (NYSE: IBM), and Nishan Systems Inc.

Of course, the bottom-line question is: How much are shares of Andiamo actually worth? Right now, that's unknown. According to the terms of the deal, Cisco will exchange shares of its common stock for Andiamo shares (those held by Andiamo's employees). The overall transaction, expected to close sometime in the first half of 2004, could be worth as little as zero and as much as $2.5 billion, although industry observers say the final price won't be nearly that high.

Cisco argues that the Andiamo spin-in is a better deal for everyone involved, including shareholders, than if it had arranged a more conventional acquisition. Why? Because the ultimate purchase price is tied to how much Andiamo gear Cisco can sell (during an unspecified three-month period hence). Therefore, Cisco says, it will get a fairer valuation than if it had purchased Andiamo without knowing the viability of its products.

But analysts point out that under this deal, Cisco may have an incentive to not aggressively market and sell Andiamo switches so that the purchase price remains lower. Cisco's Hannafi insists the deal is based on "mutual trust" between the two companies.

"If you look at the structure and the way it's been put together, it implied a lot of trust from Cisco on the development process and the entrepreneurial ability of the team at Andiamo, and similarly from Andiamo a trust in Cisco doing the right thing for its customers," he said.

Perhaps Cisco's next challenge will be to rally its sales channels to move products that will ultimately help line the pockets of the 300 or so engineers and executives associated with Andiamo.

In an interesting side note, on Tuesday Brocade announced that Mark Leslie, former chairman and a current director of Veritas Software Corp. (Nasdaq: VRTS), has retired from Brocade's board of directors. Veritas has been working very closely with Andiamo to develop virtualization and volume management features, and it's possible that Leslie -- or Brocade -- perceived a conflict of interest in his role on Brocade's board (see Brocade Names Paisley to Board and Veritas Puckers Up for Cisco).

— Todd Spangler, US Editor, Byte and Switch
http://www.byteandswitch.com

(34)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
Page 1 / 4   >   >>
PrivateCEO
50%
50%
PrivateCEO,
User Rank: Light Beer
12/4/2012 | 9:53:08 PM
re: Cisco's Creative Andiamo Options
In my experience, sales people don't care where the products they have to sell come from or who gets rich in producing them. They live for commissions and the kill and will welcome the Andiamo-sourced products so long as they provide a competitive edge.
KPSmells
50%
50%
KPSmells,
User Rank: Light Beer
12/4/2012 | 9:53:08 PM
re: Cisco's Creative Andiamo Options
It is interesting that the media has focussed a lot (and quite appropriately) on wall street for conflict of interest stories. I wonder why no focus on Sand Hill Road and the VC Industry ? I think lot of VCs had huge conflicts of interests that led to inflated valuations and the bubble. Lot of people lost lot of money and their retirement, thanks to conflict of interest among the VCs.
pooh-bear
50%
50%
pooh-bear,
User Rank: Light Beer
12/4/2012 | 9:53:07 PM
re: Cisco's Creative Andiamo Options
Cisco is still being extremely secretive about who Andiamo's employees are. The only ones it has publicly named so far are CEO Buck Gee and VP of marketing Jacqueline Ross.

Dear Lightreading,

Did you bother to look on CiscoGÇÖs public web site? More evidence of Crescendo roots:

August 20, 2002

Cisco today announced the Cisco MDS 9000 Series, a a comprehensive family of multilayer intelligent storage switches that deliver a number of storage networking innovations to customer. News@Cisco caught up with two executives from Cisco's Switching, Voice, and Storage Group -- Luca Cafiero, Senior Vice President and General Manager and Soni Jiandani, Vice President of Marketing. Here's what they had to say about Cisco's new storage networking product line.

http://newsroom.cisco.com/dlls...

pooh
docsisdude
50%
50%
docsisdude,
User Rank: Light Beer
12/4/2012 | 9:53:07 PM
re: Cisco's Creative Andiamo Options
why does everyone assume this is such a great deal for the people of Andiamo? if their sales son't amount to much, they're pretty screwed.
Iipoed
50%
50%
Iipoed,
User Rank: Light Beer
12/4/2012 | 9:53:05 PM
re: Cisco's Creative Andiamo Options
PrivateCEO- please remember that every company is out there for one reason- SUPPORT SALES. If a company is operating and every person in that company does not consider themselves a sales person then I doubt they will ever be successful. IMHO
BobbyMax
50%
50%
BobbyMax,
User Rank: Light Beer
12/4/2012 | 9:52:59 PM
re: Cisco's Creative Andiamo Options
It is clear that Cisco's accounting practices, option awards, product pricing, and promotion principles are not being watched over by the government and industry analysts.

It is a surprising to learn that Cisco has housed Andioamo on its premises and provided staff. Based on this information, Cisco is the complete owner of the company and it can circumvent State and Federal Laws to take advantage of the purposeful chaos that it has created.

The question of promotion of four personnel in Cisco to higher level positions from a total workforce of 30 personnel from Cresendo Communications ( acquired by Cisco) is mind bogling and is unjustifiable from the perspective of governing corporate standards. In fact, a public corporation of the size of Cisco rarely behaves in this pension.

Cisco so far has not disclosed its storage products. Once the products are out, opnions will be expressed. It is not clear what Cisco could have done in making various proclaimations about its market share. It had done similar false claims regarding its market share in the optical networking industry.

Cisco has claimed that it has storage routers for LAN based SANs. It is not clear as to what it has done to make very tall claims. Cisco has a lot of LAN routers and making some minor modications would turn the old routers such as Catalyst routers into storage routers. Its per port also appears to be very high. It would also be interesting to watch how it has charged for R&D expenses when the p[roduct is a derivative of an old product.
Todd Spangler
50%
50%
Todd Spangler,
User Rank: Light Beer
12/4/2012 | 9:52:57 PM
re: Cisco's Creative Andiamo Options
Luca Cafiero and Soni Jiandani are Cisco employees, not Andiamo employees. Cisco says they are not among the 37 Cisco employees who have been "seconded" to Andiamo.
boozoo
50%
50%
boozoo,
User Rank: Light Beer
12/4/2012 | 9:52:57 PM
re: Cisco's Creative Andiamo Options
"Cisco has a lot of LAN routers and making some minor modications would turn the old routers such as Catalyst routers into storage routers."

Can you be more specific as to what are the "minor modifications" you spoke about?

boozoo
router123
50%
50%
router123,
User Rank: Light Beer
12/4/2012 | 9:52:56 PM
re: Cisco's Creative Andiamo Options
Could these employees have made a difference outside of cisco. In the present market scenario,
it would have made less of a difference if these
folks had quit. This is a scam on the part of
cisco. The next in line i believe is Calix. Any
smoke here ???
PacketProtector
50%
50%
PacketProtector,
User Rank: Light Beer
12/4/2012 | 9:52:54 PM
re: Cisco's Creative Andiamo Options
What this article doesn't mention is that many of these spin-in deals are made with very specific milestones along the way. If the milestones aren't met, the spin-in company's employees may not get anything. It is a form of protection for the parent company. Granted the parent's investment in the company may become worthless, but so too would the stock of all the spin-in shareholders.

I don't know how this deal was structured, but it may well have been *less* risky for Cisco to do it as a spin-in. It's much easier and probably less expensive to cut off funding to an outside entity than fire an entire group within the company.

In the end, if they get a good storage product on the market, it may benefit the parent company, spin-in employees, and the shareholders of both.

- P
Page 1 / 4   >   >>
Light Reading’s Upskill U is a FREE, interactive, online educational resource that delivers must-have education on themes that relate to the overall business transformation taking place in the communications industry.
NEXT COURSE
Wednesday, July 27, 1:00PM EDT
The Changing Face of the Data Center World
Rodney M. Elder, Senior Solutions Architect, Equinix
UPCOMING COURSE SCHEDULE
Wednesday, August 3, 1:00PM EDT
The Central Office Re-Architected as a Data Center
Guru Parulkar, Executive Director, Open Networking Research Center, Open Networking Lab
Wednesday, August 10, 1:00PM EDT
Telcos & Open Source 101
Phil Robb, Senior Technical Director, OpenDaylight
Friday, August 12, 1:00PM EDT
The Role of Open Source in NFV
Jim Fagan, Director, Cloud Practice, Telstra
in association with:
From The Founder
The more things change, the more they stay the same for Juniper's next-gen comms solutions, and that's a good thing.
Flash Poll
Live Streaming Video
Charting the CSP's Future
Six different communications service providers join to debate their visions of the future CSP, following a landmark presentation from AT&T on its massive virtualization efforts and a look back on where the telecom industry has been and where it's going from two industry veterans.
LRTV Custom TV
NetScout: Maximizing Enterprise Cloud for Digital Transformation

7|20|16   |   04:53   |   (0) comments


Light Reading Editor Mitch Wagner talks to NetScout CMO Jim McNiel about maximizing the benefits of enterprise cloud and digital transformation while minimizing potential pitfalls with a proper monitoring and instrumentation strategy.
Women in Comms Introduction Videos
Ciena's VP Offers a Career Crash Course

7|20|16   |   4:14   |   (0) comments


How did Ciena's Vice President of Sales, Angela Finn, carve out her career path? Simple, she tells WiC. She stayed true to her company, customers and principles. She shares her advice for women on how to be authentic and credible, as well as for companies that want to make a real change to their culture and practices.
LRTV Custom TV
NFV in 2016: Part 2 – Climbing the Virtualization Maturity Curve

7|19|16   |   06:56   |   (0) comments


Many of the initial use case implementations are single-vendor and self-contained. The industry is still climbing the virtualization maturity curve, needing further clarity and stability in the NFV infrastructure (NFVi) and greater availability and choice of virtualized network functions (VNFs). Interoperability between NFVis and VNFs from different vendors ...
Telecom Innovators Video Showcase
Versa Networks' Kumar Mehta on SD-WAN Managed Services

7|19|16   |     |   (0) comments


In Silicon Valley, Steve Saunders sits down with Versa's Kumar Mehta for an interview focused on why service providers are building SD-WAN managed services, and how Versa's telco customers are innovating.
LRTV Custom TV
Juniper Networks & The Evolution of NFV

7|19|16   |   06:01   |   (0) comments


Senior Juniper Networks executives talk to Light Reading Founder & CEO Steve Saunders about NFV developments and the recent independent evaluation by test lab EANTC of Juniper's Cloud CPE solution.
LRTV Interviews
CenturyLink Goes Beyond Managed WiFi

7|19|16   |     |   (0) comments


CenturyLink's managed WiFi allows enterprises, such as retailers and resorts, to track guest WiFi usage in order to help them better communicate with customers.
LRTV Interviews
AT&T Launches Network Functions on Demand

7|17|16   |   05:26   |   (0) comments


Roman Pacewicz, Senior Vice President, Offer Management & Service Integration, AT&T Business Solutions, discusses the operator's launch of its Network Functions on Demand service.
LRTV Interviews
Enterprise Pitch for Ciscosson

7|14|16   |   04:43   |   (0) comments


After seven months of near silence, Cisco and Ericsson executives publicly discussed details on their extensive partnership. Among the tidbits shared by Martin Zander, VP, group strategy programs, Ericsson, and Doug Webster, VP service provider marketing, Cisco: The partnership was initially launched to serve the service provider market, but is already gaining ...
Wagner’s Ring
Cisco Faces Up to Hypercloud Threat

7|13|16   |   02:42   |   (0) comments


Facebook, Amazon and Google mostly don't buy branded technology for their networks – they build their own. That's a threat to Cisco – and its competitors too – which face potentially dwindling demand for their product. Is Cisco up to the challenge? Light Reading went to the annual Cisco Live conference to find out.
LRTV Huawei Video Resource Center
Building a Better Connected Russia

7|13|16   |     |   (0) comments


At UBBS World Tour 2016, Alla Shabelnikova of Ovum shares the findings of a white paper outlining the challenges and opportunities of broadband rollout in Russia.
LRTV Huawei Video Resource Center
The Global Video Business

7|13|16   |     |   (0) comments


At UBBS World Tour 2016, Roger Feng of Huawei shares insights on the future of video business.
LRTV Huawei Video Resource Center
UBBS World Tour Moscow Highlights

7|13|16   |     |   (0) comments


At UBBS World Tour 2016 at Moscow, Huawei showcases its outstanding progress in video technology.
Upcoming Live Events
September 13-14, 2016, The Curtis Hotel, Denver, CO
September 27, 2016, Philadelphia, PA
November 3, 2016, The Montcalm Marble Arch, London
November 30, 2016, The Westin Times Square, New York City
December 6-8, 2016,
May 16-17, 2017, Austin Convention Center, Austin, TX
All Upcoming Live Events
Infographics
Five of the Top 10 most targeted countries in Check Point Software Technologies' global Malware & Threat Index for Q1 2016 are in Africa.
Hot Topics
SoftBank Muscles In on ARM in $32B Deal
Iain Morris, News Editor, 7/18/2016
Ericsson 'Doubles' Savings Goal as Sales Slump
Iain Morris, News Editor, 7/19/2016
Kevin Lo's Move to Facebook: Sign of Things to Come?
Patrick Donegan, Chief Analyst, Heavy Reading, 7/20/2016
Is Dish Going Down the Drain?
Alan Breznick, Cable/Video Practice Leader, Light Reading, 7/21/2016
Facebook Gets Its Drone On
Ray Le Maistre, Editor-in-chief, 7/22/2016
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
There's no question that, come 2020, 5G technology will turn the world's conception of what mobile networking is on its head. Within the world of 5G development, Dr. ...
I've enjoyed interviewing many interesting people since I rejoined Light Reading, but William A. "Bill" Owens certainly takes the biscuit, as we say where I come from.
Live Digital Audio

Our world has evolved through innovation from the Industrial Revolution of the 1740s to the information age, and it is now entering the Fourth Industrial Revolution, driven by technology. Technology is driving a paradigm shift in the way digital solutions deliver a connected world, changing the way we live, communicate and provide solutions. It can have a powerful impact on how we tackle some of the world’s most pressing problems. In this radio show, Caroline Dowling, President of Communications Infrastructure & Enterprise Computing at Flex, will join Women in Comms Director Sarah Thomas to discuss the impact technology has on society and how it can be a game-changer across the globe; improving lives and creating a smarter world. Dowling, a Cork, Ireland, native and graduate of Harvard Business School's Advanced Management Program, will also discuss her experience managing an international team focused on innovation in an age of high-speed change.