IDC: Cisco Will Make Optical Acquisition

Like its peers, Cisco Systems embarked on an optical networking binge in the late 1990s, leveraging its mushrooming market value to acquire startups in the promising field.

When the market faltered in mid-2000, the San Jose, Calif., telecom equipment giant stood pat, carving out a small, but respectable, business among communications service providers.

“Over the last two years, Cisco could have bailed out, other companies did,” said Sterling Perrin, a senior research analyst at IDC. “Now, they need to retrench and regroup.”

Because of this commitment, Perrin and his colleagues at the Framingham, Mass., IT research firm, believe Cisco is preparing to make a major optical acquisition in 2003. Two other factors make the scenario feasible.

First, Cisco is sitting on a pile of cash, in contrast to its competitors — Alcatel, Lucent and Nortel — who are still scaling back and must answer to cost-conscious shareholders. This lessens the chances of a bidding war for takeover targets, Perrin said.

Second, though the overall telecom market is showing signs of stabilizing, the two-year slump has tamped valuations of takeover targets.

A Cisco spokeswoman was not immediately available for comment, and companies rarely comment on speculuation. Earlier this month, however, Cisco CEO John Chambers flagged optical as a growth area for the company, which still derives the bulk of its revenue from route and switch sales to enterprise customers.

So what’s out there?

Ciena , a Linthicum, Md., maker of gear to manage traffic on optical networks, could be a good fit, Perrin said. The company has advanced products with a minimal overlap with Cisco’s line as well as a good customer base, including AT&T.

Ciena would also benefit from Cisco’s wide reach and marketing apparatus. Ciena, however, has cash in its coffers as well, and recently provided a relatively optimistic picture for the rest of the year.

Other possibilities include Corvis and Sycamore Networks , two companies that thrived during the telecom boom, but have had to tighten their belts since.

They too have downplayed merger talk and may not be as attractive as they were 18 months ago because of cutbacks, Perrin said.

To be sure, Cisco will also continue to snap up emerging companies and shop the bankruptcy bargain bin for intellectual property or product lines that could help its optical unit, but Perrin expects something more dramatic.

“(Cisco has) gone the technology route before by buying startups,” Perrin said. “They need to be buying a company that already has customers and products, a big bet is more compelling.”