Optical/IP Networks

Cisco Owns Up to Andiamo

The Enron scandal and the ensuing paranoia around accounting appears to have prompted Cisco Systems Inc. (Nasdaq: CSCO) into finally disclosing details of its investment in storage networking startup Andiamo Systems Inc.

Cisco, which divulged the information in its quarterly filing with the Securities and Exchange Commission (SEC), says it owns 44 percent of Andiamo, having pumped $42 million into the firm as of January 26, 2002, and promised an additional $42 million in funding. [Cisco's 10-Q does not name Andiamo, but Cisco representatives confirm that the "fourth company" referred to in the document is Andiamo.]

What's more, Cisco says it has an option to purchase the remaining interest it doesn't own in Andiamo for Cisco stock that could be worth as much as $2.5 billion. Cisco says such a spin-in of Andiamo will happen no later than July 2004 -- if it occurs at all, since the acquisition is contingent on certain conditions Andiamo must meet. In addition, if it decides to buy Andiamo, Cisco says it will provide another $100 million in funding.

Until now, Cisco has never publicly acknowledged its involvement with the company, even though its relationship with the IP storage switch maker has been reported several times in Light Reading and Byte & Switch (see Cisco Reaffirms SAN Strategy, All Eyes on Cisco, and Cisco’s Secret SAN Strategies Revealed).

While Andiamo's other financial backers aren't known, Veritas Software Corp. (Nasdaq: VRTS) is rumored to have taken a stake in it (see Andiamo: Getting Warmer?). Andiamo did not return phone calls requesting information (gigantesco surprise).

Why did Cisco wait until now to reveal its funding of Andiamo? A Cisco spokeswoman says the disclosure was prompted by a new SEC guideline, known as FR-61, regarding liquidity and capital resources -- including off-balance-sheet arrangements. The rule was issued Jan. 22, 2002, after the Big Five accounting firms petitioned the SEC, in the wake of Enron's meltdown, to require companies to provide more information about financial transactions.

"We're providing the information in the spirit of FR-61," says the Cisco rep. "It's an attempt to be more open and more transparent."

The purchase price of Andiamo, Cisco says, will be determined by applying a multiple to the actual revenue generated from sales of its products during a three-month period, on an annualized basis. A Cisco spokeswoman wouldn't say which three-month period it had in mind (nor when Andiamo might actually start shipping products).

Cisco's option to buy is exercisable only if Andiamo -- based in San Jose, Calif., in a building it shares with Cisco -- has "satisfactorily completed the development of a specified product by a specified date and commercial sales of that product have commenced." Again, no details about when the product might ship. Cisco says it made its initial investment in Andiamo in the quarter ended April 28, 2001. Since then, Cisco disclosed, it has accounted for $38 million of its investment in Andiamo as research and development costs on its own balance sheet. That $38 million of Cisco R&D spending amounts to 100 percent of the net losses of Andiamo, "as if such losses constituted development costs of Cisco," the company says in its SEC filing.

In addition to its Andiamo interest, Cisco disclosed that it has given another $38 million (of a total commitment of $58 million) to three unnamed startups. Cisco has accounted for $29 million of the total as an R&D expense. The aggregate acquisition price for these three would be $500 million in Cisco stock. One of the mystery startups is thought to be Calix Networks, which has appointed Carl Russo, Cisco's VP of optical strategy, to its board (see Calix Boosts Management Muscle).

— Todd Spangler, Senior Editor, Byte and Switch

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skeptic 12/4/2012 | 10:48:37 PM
re: Cisco Owns Up to Andiamo
I looked at the 10Q filing yesterday. It
doesn't mention Andiamo by name or any of the
three others. Now you could guess that it
was Andiamo being discussed, but unless I missed
something the SEC filing doesn't say who any
of the four companies are by name. (it does
detail all of the terms of any possible deal
and cisco's investments for each though).
kodiak41 12/4/2012 | 10:48:36 PM
re: Cisco Owns Up to Andiamo Is Cisco a possible competitor to EMC? Is the storage world going to move from FC to GE sooner than later?
Scott Raynovich 12/4/2012 | 10:48:36 PM
re: Cisco Owns Up to Andiamo A Cisco spokeswoman confirmed it on the phone, as discussed in the story.
high plains drifter 12/4/2012 | 10:48:35 PM
re: Cisco Owns Up to Andiamo excellent article. and with a significant amount of analysis/insight this time as well. I find it hard to believe that the guys from Calix (Hatfeild and the others who killed it with ~$7B for Cerent) would limit themselves to less than ~$450M buyout from Cisco. that would mean that Calix is actually one of the other startups or that their buyout might consist of some cash as well?? who knows, it's all speculation...
LightMan 12/4/2012 | 10:48:34 PM
re: Cisco Owns Up to Andiamo I asked about this yesterday in a post, guess the LR folks heard the same as I. Don't suppose they got the name Andiamo from Andiamo's in Addison, TX. ;)
rbkoontz 12/4/2012 | 10:48:31 PM
re: Cisco Owns Up to Andiamo Agreed. Kudos to LR on the article, however I have to question the Calix comment. The Russo connection is not enough for me. I simply believe Hatfield (Calix CEO) respects the work Russo did at Cerent and recognized he can complement Mike's abilities.

I have concur with High Plains (CL?) that Calix would limit themselves to anything less than $Billions. After the Cerent windfall, Calix is all about ego for the execs. In fact, I'd venture to guess Hatfield and crew are hell bent on IPO and would rather flame out than settle for a measley $500M.

Rumor is the C6 product still has a long way to go having been booted out of several ILEC labs. The engineers are exhausted and wondering how many rounds to go. The company is questioning whether they will be ready for a hyped unveiling at Supercom or conduct another secret showing. The company is facing another funding round and obviously facing a down round which may demotivate the troops futher.

AAL5 12/4/2012 | 10:48:31 PM
re: Cisco Owns Up to Andiamo
The Cisco funding Calix rumour is untrue, I do not know where this "information" came from. I suspect it is just because Russo has a connection with Calix and Cisco are known to be funding other startups.

chiarojo 12/4/2012 | 10:48:30 PM
re: Cisco Owns Up to Andiamo ...given that CSCO confirms it is Andiamo, i wonder what folks at Nishan (another Storage-over-IP outfit www.nishansystems.com) are feeling... Jayshree Ullal used to be on the board. She currently heads the Metro product div. at CSCO as part of the mario-charlie-jayshree enterprise mafia running the various CSCO groups.

Also, given this newfound religion of 'disclosure', i wonder if scott should interview Volpe and his partner in (optical) crime - Ammar Hanafi (busdev)... there may be more stories buried in there than lr has uncovered to date....
deepciscothroat 12/4/2012 | 10:48:27 PM
re: Cisco Owns Up to Andiamo The real story here is that Chambers does not like to lose his long-term staff and bribed Mario Mazzola and much of his team to stick around by funding Andiamo (which Mario named -- it means, let's go in Italian) and then putting an absurd price on a spin in. Talk about shareholder lawsuits. In an era when Cisco is laying off thousands of people, Chambers does not mind bribing a handful of old-time execs with billions of upside and NO risk. No one in Andiamo put any of their own money in and the they stay on the Cisco payoll (Mario is running the entire technology group at Cisco while he also vesting his upside on Andiamo). Where is the SEC when you need them
kbkirchn 12/4/2012 | 10:48:25 PM
re: Cisco Owns Up to Andiamo Cisco has long maintained that the future will be everything transported over a shared IP network with appropriate QoS mechanisms. EMC's vision is that SAN will require its own physical network (what they do now).

How do Andiamo products (future products) compare to Cisco's own SAN routers sold today? Any overlap?
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