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Optical/IP Networks

Cisco Buys Andiamo

Cisco Systems Inc. (Nasdaq: CSCO) today said it will spin in Andiamo Systems Inc. -- the quasi-independent, Cisco-incubated SAN switch startup -- in a transaction that could amount to as much as $2.5 billion in stock (see Cisco to Acquire Andiamo).

The deal is likely to amount to a huge stock windfall for Andiamo's executives and employees. The startup, founded in January 2001, has about 270 employees, according to Cisco. Those employees, including CEO Buck Gee, will join the Cisco Storage Technology Group on the closing of the acquisition.

Also today, as expected, Cisco announced the MDS 9000 family of multiprotocol SAN switches, based on the Andiamo technology (see Cisco Announces Andiamo Switches). Byte and Switch reported the first details of Andiamo's Fibre Channel and IP switches last week (see Cisco to Christen Andiamo Family).

"This acquisition supports Cisco's strategy to enter into new growth markets, such as storage networking, where we believe we have the potential to be the No. 1 or 2 player," Cisco president and CEO John Chambers said in a statement. "Andiamo's technology blends the benefits of data networking and storage networking. We are proud to offer our customers innovative storage solutions that will not only reduce costs but deliver efficiencies that help drive productivity gains."

In 2001, Cisco entered into agreements with Andiamo under which it was granted the right to acquire Andiamo. Cisco disclosed its involvement in Andiamo for the first time in its 10-Q filing with the Securities and Exchange Commission (SEC) in March (see Cisco Owns Up to Andiamo).

In an 8-K form it filed today with the SEC, Cisco says it expects the transaction to close in the third quarter of its 2004 fiscal year (February to April 2004), but no later than July 31, 2004.

Cisco is calling the spin-in of Andiamo an acquisition of a "privately held" company, but in reality it has treated Andiamo as an in-house R&D project. In fact, since its initial investment in Andiamo in April 2001, Cisco has expensed the entire amount of its funding as research and development costs, according to regulatory filings. To date, Cisco has poured $74 million into Andiamo, giving it about a 44 percent equity stake in Andiamo. (Cisco says no other public companies or venture capital firms have invested in Andiamo, and that Andiamo employees hold the entire remaining interest in the startup.) In addition to that, Cisco has committed to providing an additional $100 million in funding to Andiamo through the closing of the acquisition.

In its 8-K filing, Cisco also notes that it is the "exclusive manufacturer and distributor of all Andiamo products."

But the purchase price of Andiamo hasn't been determined yet, and it's based on a rather complicated formula. Cisco says it will exchange shares of its stock "for all outstanding shares and options of Andiamo not owned by [Cisco] at the closing of the acquisition." The purchase price for the remaining equity interests in Andiamo "will be based primarily upon a valuation of Andiamo to be determined by applying a multiple to the actual, annualized revenue generated from sales by [Cisco] of products attributable to Andiamo during a three-month period shortly preceding the closing."

Cisco says there's no minimum purchase price, but that the maximum purchase price is limited to about $2.5 billion in Cisco shares. (However, industry analysts believe the transaction will ultimately be far less than that.) Shares of Cisco closed at $14.72 yesterday.

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

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