Cisco Turns Up Voice Signal

Cisco Systems (Nasdaq: CSCO) snapped up two more privately held technology companies Thursday, which both have expertise in the voice-over-IP arena. The move reaffirms growing interest in using VOIP technology to integrate the data-switched and circuit-switched world.

For a total of approximately $369 million in stock, Cisco acquired both IPCell Technologies of Richardson, Texas, and Vovida Networks, San Jose, Calif. Both companies have technologies that will help Cisco support the development of voice applications for IP-based networks, a key linchpin in Cisco's battle against traditional phone-switching equipment providers like Nortel (NYSE: NT) and Lucent (NYSE: LU).

Cisco is trying to sell service providers on the idea of IP-based networks, but carriers still face heavy demands for voice traffic, which is still handled mostly by circuit-switched infrastructures. According to one venture capitalist, Cisco was wise to beef up its VOIP offerings, since voice is still many a carrier's prime concern.

"If you take all the data stuff it's barely a pinhead compared to the pin cushion of the voice world," said Timothy Kraskey, managing director at YankeeTek Ventures. Kraskey, a former vice president at Ascend Communications (now part of Lucent), says the rush to data-only networks is often overestimated.

"Everybody says the world is moving to data right away, but that's not happening," Kraskey said. "The reality is that the voice world is huge and it will take 25 years or more for it to move to the data world."

So in order to accomodate carriers -- its long-term strategic market -- Cisco must do all it can to support the nascent voice-over-IP market. According to Kraskey, Cisco landed a bargain with its combined purchase Thursday.

"It's a pretty good price [the $369 million]," said Kraskey, who lauded Vovida's software and IPCell's knowledge background in the softswitch area

While IPCell produces software that consolidates voice and data traffic over an IP or ATM connection, Vovida operates under an open-source distribution model, providing tools for building VOIP implementations on Linux-based platforms. Alec Henderson, manager of marketing operations in Cisco's packet telephony division, said the acquisitions may be more important from a momentum-building point of view, rather than a fiscal one.

The primary objective of the acquisitions is to continue to encourage developers to work on building VOIP applications for service providers, Henderson said. "Those types of applications give service providers more reasons to build out their [IP] networks, which means they need to buy more networking gear -- and that's certainly in Cisco's interests," Henderson said.

Henderson said that Cisco would continue to operate Vovida as an open-source provider. Though Cisco did not break out the individual costs paid for each company, Henderson said it was "fair to assume" that IPCell cost more than Vovida, since IPCell has 110 employees to Vovida's 65. Cisco had previously invested in both companies, holding a 20.5 percent interest in Vovida and 17.2 percent of IPCell before the acquisitions.

Cisco said it will account for the acquistions as a purchase, to be completed in the second quarter of Cisco's fiscal year 2001, which ends in January. The company said it will take a one-time charge for the acquisitions as purchased in-process R&D, at an expense not to exceed two cents a share. The acquisitions are Cisco's 18th and 19th this year.

-- Paul Kapustka, Silicon Valley bureau chief, Light Reading http://www.lightreading.com