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Cisco, Corning Team for Portfolio Sell

Light Reading
News Analysis
Light Reading
11/14/2000

Cisco Systems Inc. (Nasdaq: CSCO) and Corning Inc. (NYSE: GLW) announced this morning that they'll join together to sell optical networking gear to service providers (see Corning, Cisco in Strategic Alliance ). In the process, they're hoping to get some traction for the components and products they've both purchased from Pirelli SpA.

Both companies characterize the deal as a nonexclusive, loosely worded "memorandum of understanding," and both decline to provide specific terms. But they say Cisco and Corning will jointly develop, market, and sell optical networks to carriers worldwide, using facilties of both companies. In some cases, this will involve developing new products to order for service providers. In others, it will mean implementing optical networks using existing Cisco hardware along with Corning cable and amplifiers.

The deal is the first joint marketing agreement that Cisco and Corning have publicly acknowledged. But it's not the first time the two have been involved in business together. "We've been working with Corning for awhile," acknowledges Gary Borad, business development manager for strategic alliances at Cisco. Their relationship has included joint projects just like those they're now touting, he says.

The two companies also share a common history with Pirelli. Last year, Cisco bought Pirelli Optical Systems for $2.5 billion and sank $100 million into the Pirelli Cables and Systems optical components business. In September Corning pledged to pay about $3.6 billion to buy 90 percent of Pirelli's optical components business from Cisco. And in October Corning bought the remaining 10 percent.

But Pirelli's been a problem for both Cisco and Corning. For its part, Cisco hasn't made much on selling Pirelli DWDM (dense wavelength-division multiplexing) gear (see Cisco Puts New Spin on Pirelli). And Corning acknowledges it's taken on a components division that isn't profitable (see Corning Expands Components Empire).

Enter today's "memo of understanding." By joining together and selling products into each other's customer bases, both companies stand a chance of increasing sales of their respective Pirelli products. After all, it might be difficult for carriers to refuse the potential cost savings of a joint deal by two vendors with sizeable shares of their respective segments.

Cisco's Borad is clear that buying from Cisco and Corning will result in savings to carrier customers. "We hope to reduce carriers' system engineering costs and time to market," he says. And he says that while Cisco plans to include all of its products in sales with Corning, "Clearly, there'll be some exposure for Pirelli."

Analysts seem skeptical that even Cisco and Corning can make a silk purse out of a sow's ear. "What a joke," said one Wall Street banker, who asked for anonymity. "Pirelli's products don't work. The value of the deal is zero."

"I'm not sure this is a big deal," says Alan Bezoza, analyst with CIBC World Markets. "It looks like a follow-on to Corning's earlier purchase of the Pirelli shares."

But others see at least one advantage. "This should help Cisco widen its distribution channel," says Gina Sockolow, analyst with Brean Murray & Co. Inc.. She says that for Cisco it fits a smart strategy of acquiring finished products in the optical space and then selling them to a broader market that includes providers of edge-based optical services.

Cisco's share price rose nearly 5 percent today and was trading at $52.81 by midafternoon. Corning's share price rose nearly 10 percent, trading at $65.37.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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