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Cisco Buys Andiamo

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News Analysis
Light Reading
8/20/2002
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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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jamesbond
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jamesbond,
User Rank: Light Beer
12/4/2012 | 9:54:48 PM
re: Cisco Buys Andiamo
Why go through all this hassle? why not start
a group and give them similar number of
csco options to begin with? What is the
advantage of starting a company and buying
it back?
Belzebutt
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Belzebutt,
User Rank: Light Beer
12/4/2012 | 9:54:47 PM
re: Cisco Buys Andiamo
Why go through all this hassle? why not start
a group and give them similar number of
csco options to begin with?


It makes people feel like they're working at a startup when they aren't.
pooh-bear
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pooh-bear,
User Rank: Light Beer
12/4/2012 | 9:54:47 PM
re: Cisco Buys Andiamo
This is a very creative way of motivating employees whose regular stock options are underwater. That is, transfer to an internal 'start-up' that then gets acquired for some highly inflated price.

This is all very legal, and very cool if you are one of the chosen few (or chosen 270), but I wonder if Cisco shareholders really understand what is happening, and the relative value of the acquisition. Of course, none of us know the relative value until the deal closes - somewhere between $0 and $2.5.

But it just doesn't appear to be 100% above-board. Does it?
CoreASIC
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CoreASIC,
User Rank: Light Beer
12/4/2012 | 9:54:45 PM
re: Cisco Buys Andiamo
One advantage of these spin in deals is Cisco can
partially fund product development into new
markets without hitting the expense line of their income statement. Their investment is carried as
an asset. As a major investor, they get an
insider position in the startup and can influence
its direction. If the product/company pans out,
they can buy it and know exactly what they are
getting. If it doesn't pan out, they write off
the investment. But the write off is a lot less
than what it would have been if they had funded
the effort internally.




snarfulent
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snarfulent,
User Rank: Light Beer
12/4/2012 | 9:54:43 PM
re: Cisco Buys Andiamo
The part of this story I find interesting is
the calculation of valuation based on _eventual_ revenues a year or two down the road.

What would the start-up world look like if all
acquisitions were valued this way?

No more blind hope that some "greater fool"
would be duped into buying some semi-failed
start-up. A start-up couldn't say "we seem
to be the 5th best product out there, hopefully
there are at least 5 acquirers!". And you
couldn't aim to hand-over a burnt-out, used-up,
embittered employee base to the acquirers.

Of course, if the valuation is a multiple of
revenues in a particular quarter, the employees
are certainly motivated to mortgage their homes
and buy lots of their own product that quarter! :)
justreading
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justreading,
User Rank: Light Beer
12/4/2012 | 9:54:43 PM
re: Cisco Buys Andiamo
How do you know that the value is between $0 and $2.5?

Are there a billion shares outstanding?
dodo
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dodo,
User Rank: Light Beer
12/4/2012 | 9:54:42 PM
re: Cisco Buys Andiamo
"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"

In the old days, before Cisco, they use to call this type of deal- Skunk financing and R&D.
teledead
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teledead,
User Rank: Light Beer
12/4/2012 | 9:54:41 PM
re: Cisco Buys Andiamo
I am curious to learn how CSCO book this. They invested $2.5 billion on their own earlier investment of $80 million. Does 40% of this 2.5B counted as investment gain from their book? If so, we need another SEC rule I think.

tink
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tink,
User Rank: Light Beer
12/4/2012 | 9:54:41 PM
re: Cisco Buys Andiamo
Skunk works is an perfect description for Andiamo. An interesting and concise history of the term can be found at http://www.quinion.com/words/q...
justreading
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justreading,
User Rank: Light Beer
12/4/2012 | 9:54:40 PM
re: Cisco Buys Andiamo
I thought you meant each share is $0-$2.5

I know the deal is worth $0 - $2.5 billion
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