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Cisco Goes Spin-Crazy

Cisco buys two previously mysterious spin-ins to help revive its cable/broadband and Internet switching products

May 1, 2002

4 Min Read
Cisco Goes Spin-Crazy

Cisco Systems Inc. (Nasdaq: CSCO) dropped more clues about its evolving acquisition and product strategy this morning when it announced that it's acquiring two startups, Hammerhead Networks and Navarro Networks, for $285 million (see Cisco Buys Hammerhead, Navarro).

The most notable thing about the deals it that they are both "spin-ins" -- that is, Cisco had previously invested in and held an equity stake in the companies. Cisco used $173 million in stock to buy out the remaining interest in Hammerhead, based in Billerica, Mass., and $85 million in stock to purchase Navarro, of Plano, Texas.

The moves fit into Cisco's new strategy of making fewer acquisitions and focusing on smaller companies. The company also appears to be increasing its reliance on a spin-in strategy, whereby it invests a small amount in a startup and monitors the startup's progress, before possibly acquiring it. It is pursuing such a strategy with the storage startup Andiamo Systems Inc. (see Cisco Owns Up to Andiamo and Cisco’s Secret SAN Strategies Revealed).

The potential acquisition of these two companies caused a stir when they were previously described, along with Andiamo, in Cisco's 10-Q SEC filing for the second quarter of fiscal year 2002. In connection with the acquisitions, Cisco expects a one-time combined charge for purchased in-process research and development expenses not to exceed $0.02 per share.

Hammerhead has 85 employees, valuing the deal at $2 million per employee, and Navarro has 25 people, valuing the deal at $3.3 million per employee.

The main thing Cisco seems to be getting from Hammerhead and Navarro is key technology for its service provider products both in broadband and in Internet switching. These acquisitions show that the company is working toward building more in this market.

Not much is known about the product the Hammerhead team is building. Older postings on Internet sites suggest that at one point the company was building a carrier-class IP switch/router. But according to Cisco and others familiar with the company, Hammerhead has most recently been developing cable and broadband aggregation software. In the press release, Cisco says this software will “augment its IP aggregation portfolio consisting of cable, broadband and leased-line products.”

Analysts like Tom Nolle, president of CIMI Corp., a network consultancy, suspect that Cisco will use the Hammerhead aggregation software on its own DSL aggregation platform, the Cisco 10000 Internet Router.

“I think Cisco is trying to beef up its DSL product line capability,” he says. “RBOCs won’t make a move on DSL until the regulatory issues are worked out, but they’ve been floating around RFPs with different requirements. I think Cisco is using this acquisition to try to align itself with functionality requirements it sees coming down the road.”

This kind of software could help position the 10000 more squarely against competitors like Redback Networks Inc. (Nasdaq: RBAK) and Unisphere Networks Inc.

“That’s exactly what we are trying to do,” says Carson Chen, vice president and general manager of the cable broadband and networking business unit at Cisco. “The Hammerhead technology will allow us to provide parallel programming and some queuing that is needed for voice and video applications in cable and broadband.”

Navarro Networks, a fabless semiconductor startup that designs complex, high-performance VLSI integrated circuits, will be used in Cisco’s high-end Ethernet switching platforms.

(Analysts insist Navarro bears no relation to Dave Navarro, former guitarist for the Red Hot Chili Peppers and current beau of Carmen Electra.)

Nolle says it’s difficult to pin down which products end up benefiting from the Navarro acquisition. In general, the technology will probably be used to offload protocol management from the general processors in Ethernet switches and routers. Nolle says that for some Gigabit Ethernet and 10-Gbit/s Ethernet applications, switching devices are overwhelmed with protocol management tasks and often cannot maintain wire speed throughput.

Cisco says that it plans to retain all 85 people from the Hammerhead team along with the 25 people from Navarro. Hammerhead’s CEO Eddie Sullivan will join the Cable Business Unit in Cisco's Network Edge and Aggregation Routing Group, while Mark Bluhm, CEO of Navarro, will join the Internet Systems Business Unit in Cisco's Internet Switching and Services Group.

— Marguerite Reardon, Senior Editor, Light Reading

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