Optical/IP Networks

Cisco May Pocket Procket

Cisco Systems Inc. (Nasdaq: CSCO) is in talks to acquire routing rival Procket Networks Inc., and a deal may be close to being finalized, say sources close the company.

Rumors have been bubbling about the deal, and they were first reported yesterday in a networking Weblog, GigaOm. Yesterday evening Network World followed up on the story and reported the deal was done at $80 million.

One source told Light Reading today that the Procket board had signed on for a deal tagged at $80 million. Light Reading was unable to confirm this with a second source. Cisco was one of the original investors in Procket.

Employees at Procket reached by Light Reading on Friday say they've heard the acquisition rumors but have not been told by the company's managers what Procket's fate will be.

A few other Procket employees contacted by phone were not at work. They weren't on vacation, either. Hmmm...

Tony Li says he knows nothing.

What is without dispute is that Procket is trying to find another investor or parent, and needs to refuel or be acquired to keep running. Light Reading's sources said the company raised nearly $30 million at the end of last year. Procket acknowledge that it had raised some funding in January, but wouldn't discuss the funding amount.

"We had a first close of funds in late 2003 and intend to have a second close in Q1 2004 in the same series," said Roland Acra, Procket's president and CEO, in a statement provided to Light Reading in January (see Procket Stuffing Its Pocket).

A delay in that second close, which could have been tied to company milestones, is what may have propelled Procket to start talking to potential buyers. NTT Communications Corp. and Fujitsu Network Communications Inc. (FNC) were among the companies most recently approached, according to one source. Alcatel SA (NYSE: ALA; Paris: CGEP:PA) was an almost-done-deal that fizzled a while ago, say several former Procketeers.

"They tried to sell to Alcatel about a year ago, and when that didn't happen, the customers Procket was close to -- NTT/Verio and AOL, for instance -- took a step back," says a former Procket employee.

That source says the Procket talks with Cisco have gone far. Procket's top software developers -- A.E. Natarajan and Dino Farinacci -- recently visited Cisco's campus along with VP of engineering Jeffrey Purnell to talk technical specifics with the routing giant.

If Cisco did pull the trigger on a deal it would be getting some valuable technology and technical talent, while taking out a key challenger. "Procket challenged every technical boundary in advancing the state of the art for core routing," says a former senior Procket executive. "This may be the last challenge to the existing players in this market for many years, as to play in this market sector requires tremendous sustained investment spread across a broad product portfolio."

It's worth pointing out that Procket has often been reported in talks with suitors. Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Ltd. (NYSE/Toronto: NT) have also reportedly sat across the table from the startup over the past few years (see Will Nortel Pick Procket? and Procket Talk Turns Up).

Cisco does hold a stake in Procket, but some feel it would be crossing a line to acquire the startup, sending a bad signal that conflicts with the recent launch of the new CRS-1 core router, which was unveiled just a few weeks ago Cisco Unveils the HFR).

"Cisco has always maintained that they don't buy competing products," says a former Procket employee who previously worked at Cisco. "They have always bought complementary technologies rather than taking out competitors."

Neither Procket nor Cisco would comment for this story.

— Phil Harvey, News Editor, Light Reading

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