Cisco is the king of ‘spin-in’. For some of its most critical developments, it funds and nurtures companies outside its own walls and then buys them back when the bulk of the innovation is complete. And twice in the last decade, it has done that on an unprecedented scale.
First, in early 2001, it invested $84 million in start-up Andiamo Systems, taking 44% equity and the right to acquire the company outright. Three years later it completed that buy-out (for $750 million) and, with the move, entered the Fibre Channel switch market with a fully formed product line.
But there were even bigger plans for the Andiamo team. On 7 July 2005, Cisco confirmed the ‘retirement’ of four of its top executives, including its chief development officer Mario Mazzola and senior vice presidents, Luca Cafiero, Prem Jain and Soni Jiandani – all of whom had been founding members of Andiamo. But retirement was far from their minds. With Cisco’s guidance, they formed Nuova Systems and set about building a ‘dream team’ of developers which included the ex-CTO of VMware, Ed Bugnion, and the former founder of Ipsilion Networks, Tom Lyon.
Nuova, which was based only a few miles from Cisco’s Santa Clara HQ in Silicon Valley, was in ‘stealth mode’ for most of its three years, but it was widely known to be working on a data centre platform that would deliver I/O consolidation and a converged network, server and storage area network fabric.
By August 2006, with Nuova getting too valuable to keep at arm’s length, Cisco pushed its stake to 80% and made the company a majority-owned subsidiary, leaving the employees with the remaining 20%.
As a judgement of the value of that 20%, when Cisco announced an amendment to the agreement in April 2007, it capped the potential payout for that slice at $678 million, based on the success of Nuova data centre products over the period 2009 to 2011. At that point Nuova had 200 employees. And then in April 2008, Cisco snapped up that 20% for an undisclosed sum, saying it had spent $70 million funding the company to date.
That may have been Cisco’s 126th acquisition in its 25 year history, but it will undoubtedly prove to be one of its most important – with the potential to transform Cisco from a networking company to a leader in data centre systems and, ultimately, in cloud computing.