21 August 2002 Networking hardware giant Cisco Systems is to acquire Andiamo Systems, a privately held supplier of switches for fibre channel-based storage area networks (SANs), in a complicated deal that will take at least two years to complete.
The terms of the deal seem to have confounded many analysts and commentators in the US. Because Cisco will only pay a price for the company based on future results, some say the deal demonstrates that Cisco has been taking a more cautious approach to its long held strategy of acquiring small technology companies. The deal was struck in April 2001, after tech stocks had crashed.
But analysts also point out that, by exercising its right to buy Andiamo, Cisco has committed to pay a multiple of revenues for the company that may significantly exceed average market sector valuations. The price could range from zero to $2.5 billion, depending on sales in a three month period in 2004.
Until the deal is closed, Andiamo will operate as an independent company – although Cisco will be the exclusive manufacturer and distributor of Andiamo products. Cisco will complete the deal between early 2004 and mid 2004.
Cisco paid upfront with its shares for a long line of nearly 50 small technology companies between 1999 and 2002. If it had not acquired these suppliers of emerging technologies, Cisco says its research and development costs would have been far higher. However, it has “earn out” based arrangements, along the lines of the Andiamo deal, with at least three other venture capital backed companies.
Cisco bought Andiamo because it needs to further diversify its expansive product portfolio beyond its core business of routers, which direct traffic over the Internet and other data networks. As Cisco is the dominant supplier of routers, that market offers limited scope for further market share growth.
Analysts expect the market for fiber channel switches to boom. Gartner, for example, forecasts that the market for fiber channel storage switches will grow to $4.3 billion (€4.4bn) in 2006, from $1.2 billion (€1.23bn) in 2002. Cisco says its family of Andiamo switches will be available before the end of 2002.