Could it be the time of year? With the annual optical love-fest that is OFC just around the corner, speculation has been swirling through the transport system sector that Cisco wants to beef up its packet-optical transport portfolio (converged packet switching with optical transport capabilities in a single integrated system) and that it's drawing up a shortlist of potential takeover targets.
According to industry sources, Cisco Systems Inc. (Nasdaq: CSCO) is in the "mulling" stage and could use the OFC event to gather further intelligence and fine-tune its list of potential targets. The catalyst for such thinking, it seems, is that there's an expectation of stronger investment in packet-optical transport to support video and cloud traffic growth, for data center interconnect (DCI), and also in preparation for the uptick in traffic volumes once 5G becomes a reality and fiber access networks reach many more buildings, cell sites, small cell locations and network edge aggregation points.
Research house Dell'Oro Group recently forecast a 2% CAGR for the overall optical transport market for the 2018-22 period, while Cignal AI recently unveiled a bullish forecast for the DCI market and noted that packet-optical revenues grew by double digits in the first half of last year. (See DCI Market to Reach $1B by 2019.)
And while Cisco has a family of transport products to pitch into this market -- the Network Convergence System (NCS) series -- its portfolio is weak compared with market leaders and specialists.
But who could be in its sights? The options are a little limited: Some of the main packet-optical players are other large multi-faceted vendors such as Huawei, Nokia and ZTE, so Cisco's focus would be on the more specialist players.
So here are the companies that will likely feature in any assessment of possible packet-optical acquisition targets (in alphabetical order):
- ADVA Optical Networking -- lots of packet-optical and DCI capabilities and certainly affordable, with a market capitalization of about €310 million ($383 million). But would it be enough to meet Cisco's needs? Possibly.
- Ciena Corp. (NYSE: CIEN) -- arguably the packet-optical numero uno, looking strong and currently on one of its occasional growth spurts. That's why any bid would need to be way north of the vendor's current market cap of $3.8 billion.
- Coriant -- has plenty of innovation and smarts that enable it to compete with the other leaders and is particularly strong in driving greater efficiencies from its form factors, the kind of capabilities that attract operators such as AT&T and would also pique Cisco's interest. Coriant is privately held so it's hard to say what kind of price it would command but its revenues are estimated to be more than $500 million so a buyout would probably eat up the guts of $1 billion at the very least.
- ECI Telecom Ltd. -- it has solid products, especially for metro networks, but it's probably too reliant on one market (India). It is another privately owned company: Its revenues are estimated to be around $380 million so would probably not provide the international market heft Cisco would be looking for.
- Fujitsu Network Communications Inc. -- has some well-respected packet-optical systems and great relationships with North American operators but might be too focused on the US market to meet Cisco's needs.
- Infinera Corp. (Nasdaq: INFN) -- in an interesting place right now. 2017 was a year of transition but is now bringing new products to market and has always had a good reputation for the capabilities and focus of its systems and, particularly, the ease of deployment and management of those systems. It is set for a better 2018 and its share price is up 74% this calendar year, to around $11. Infinera's market cap is currently about $1.65 billion.
But is Cisco just fishing? Would this be a good move? Opinions are mixed. "Why would they do this?" was one response (on background) from a seasoned industry observer, who suggested any Cisco M&A would be better focused on more software-oriented sectors of the industry.
But another specialist who tracks the optical sector, and who requested anonymity, suggested that the speculation was "plausible," and that if Cisco did make a move it might even be the catalyst for others to step in and even start a bidding war.
In that scenario probably the most sensitive, and tense, situation would be if Cisco showed any interest in Ciena, which has a number of key industry relationships, including one with Cisco rival Juniper.
Responding to Light Reading's questions, Cisco said it does not comment on rumors or speculation.
— Ray Le Maistre, Editor-in-Chief, Light Reading