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Did Cogent's Aleron Buy Boost Cisco?

Light Reading
News Analysis
Light Reading

When Cogent Communications Group Inc. (Amex: COI) announced in late October that it was acquiring the assets of Aleron Broadband Services LLC, some mused that the carrier had finally shown the full extent of its ties to Cisco Systems Inc. (Nasdaq: CSCO), its main equipment supplier and financial surrogate (see Cogent Acquires Aleron Broadband).

Why? Through the acquisition, Cogent absorbed the sole customer of an up-and-coming threat to Cisco in the core routing market, Axiowave Networks Inc. Axiowave, in fact, announced a significant layoff shortly after the Cogent-Aleron deal was announced, a sign that it was bracing for a body blow with Aleron's sale (see Aleron Touts IP SLAs, Headcount: Cutting the Fat (Really)).

Cogent, which will take over Aleron’s network and customer base, also received $18 million in cash. By acquiring Aleron, Cogent -- and by extension Cisco -- has seemed to accomplish two goals: First, it netted more operating cash for Cogent and, secondly, it threw up some roadblocks for a Cisco core routing competitor. Ex-employee sources from Axiowave are grousing that the acquisition was a strategic move by Cisco to “put a nail in the company’s coffin.”

According to SEC filings, since 2000 Cisco has become a major debt holder in Cogent, restructuring away more than $269.1 million in loans in 2003, and becoming a major stockholder in the company.

Cisco’s increasing control has many wondering about the motives behind many of Cogent’s acquisitions. The Aleron acquisition was Cogent’s sixth this year; the others were Global Access, LambdaNet Communications, LNG Holdings, Symposium Omega, and UFO Communications Inc. (see Cogent Buys UFO, Cogent Adds to Euro Empire, and Cogent Buys the Boss's Network).

In each of its acquisitions, Cogent has picked up unprofitable companies that have cash and network assets, allowing Cogent to use the cash to finance its next few quarters. There have even been some rumblings that Cisco is using Cogent to make these acquisitions to keep near-new equipment from hitting the market in liquidation sales.

Cogent declined to comment on its relationship with Cisco when contacted by Light Reading. Cisco spokeswoman Robyn Jenkins says the company doesn’t comment on rumors, but she notes that ”Cisco has no voting control or say on the day-to-day running of Cogent.”

Samuel Wilson, senior analyst at JMP Securities, smacks down some of the conspiracy theories, saying that Cisco wouldn't go to such trouble to keep used equipment off the market.

“If that was their worry, Cisco would have no problem buying the equipment on the street and refurbishing it themselves,” Wilson says. “Cogent doesn’t have that many customers, and Cisco would be foolish to chance pissing off the big RBOCs who are its customers. Cogent 10 times over couldn’t buy what Sprint Corp. does in one year, so what do they have to gain by risking it?”

Conspiracy chatter aside, Cogent is far from profitable, even with the financial backing from Cisco. In its SEC filings on Nov. 15, Cogent’s net loss for the quarter ending Sept. 30 was more than $23 million, compared to a gain of $196 million in the same quarter in 2003. A closer look reveals that this was based on a line item “Gain—Cisco credit facility troubled debt restructuring” of $215 million in 2003 that was not repeated this year.

With losses mounting, the Cogent/Cisco relationship is definitely worth watching. Cogent’s goal of creating an “all optical” backbone to provide dedicated end-to-end bandwidth at a reasonable price has morphed from a simple plan to offer cheap bandwidth to an intricate acquisition strategy that's being indirectly financed by one of the most acquisitive networking companies in the world.

Of course, as Light Reading has previous reported, Cisco has been here before and, though it hasn't been as scorched as some vendors that helped finance carriers, it has picked a bushel of losers (see Cisco's Learning Experience and Cisco's Under-Powered Carriers ).

But there have been some successes, too. Cisco, in fact, shelled out millions to keep Sweden's Bredbandsbolaget AB (B2) going, and that carrier has been a pioneer in Ethernet and VOIP (see B2 Deploys Cisco VOIP Gear). The company has also had roaring success with e.Biscom SpA's (Italy: EBI) FastWeb (see Top Ten Service Providers to Watch).

So what explains the Cisco fascination with Cogent?

JMP’s Wilson believes Cisco is simply hanging on to Cogent until it can find an exit path to liquidity. “Cogent is a holdover from the bubble days of vendor financing,” he says (see Vendor Financing). “If Cisco is using its influence over Cogent, then it’d be pushing the bounds of what’s proper.”

— Chris Somerville, Senior Editor, NGS

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User Rank: Light Beer
12/5/2012 | 1:01:40 AM
re: Did Cogent's Aleron Buy Boost Cisco?

When a disgruntled ex-employee floats a conspiracy thoery, and experts tell you it doesn't make any sense, most journalists would need more than such flimsy stuff in order to write a story. Not Light Reading. Kudos!
User Rank: Light Beer
12/5/2012 | 1:01:38 AM
re: Did Cogent's Aleron Buy Boost Cisco?
For the record I ordered the power down of all the Axiowave routers PRIOR to any discussions with Cogent.

Victor R. Blake
Former Director of Network Engineering
of Aleron Broadband Services
User Rank: Light Beer
12/5/2012 | 1:01:34 AM
re: Did Cogent's Aleron Buy Boost Cisco?
When did you "ordered" the power down of all the XCR128?
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