Cisco Inks $113M Acquisition Deal

Cisco Systems (Nasdaq: CSCO) announced Thursday a definitive agreement to acquire privately held Ayr Networks in a stock deal worth as much as US$113 million.

Under terms of the deal, the networking granddaddy will purchase outstanding shares and options of Ayr Networks, which develops high-performance distributed networking services and scalable routing software technologies. Cisco already holds a 16.6 percent stake in the Palo Alto, California-based company.

Cisco will use the technology to augment its IOS software, the network operating system used by Cisco's routing and switching platforms.

Competitive Play

Yankee Group analyst Zeus Kerravala told the E-Commerce Times that the Ayr acquisition is a smart move for Cisco.

"Certainly, there have been some competing high-performance routers coming up of late," said Kerravala. "Juniper took a big chunk of Cisco's business by coming up with some real high-performance routers."

While the acquisition is not expected to have a measurable impact on Cisco's earnings, analysts said it will result in faster deployment of Cisco routers with new features and functionalities, which are designed to compete with products made by Juniper and other rivals.

All About Strategy

The Ayr acquisition follows Cisco's recent buyouts of Navarro Networks and Hammerhead Networks, both privately held companies in which Cisco also held minority interests.

All three acquisitions are part of the networking giant's research and development strategy, according to analysts, and at least half of its buys going forward will fit this model.

Gartner (NYSE: IT) analyst Mark Fabbi told the E-Commerce Times that Cisco often funds small companies in an effort to accomplish something very specific.

"There are only two paths with this type of strategy," Fabbi said. "One is failure, in which case no one ever hears about it. The other is success , which leads to the reward of acquisition."

Acquisition Frenzy

Cisco plans to acquire up to a dozen small to mid-size companies this year, according to its executives. Why the frenzy of acquisitions?

The answer, said analysts, is because it can. Within the networking arena, industry leader Cisco is in the catbird seat, with billions in assets and no debt.

Therefore, while Lucent Technologies (NYSE: LU), Nortel (NYSE: NT) Networks and others scramble to find their way back to profitability, Cisco is expanding its offerings through targeted acquisitions.

"The Ayr acquisition will help Cisco extend its leadership position in routing and switching," Kerravala said.

What Next?

Cisco is expected to gobble up several additional small companies before year's end. Analysts predict acquisitions will occur in the voice, storage and IP (Internet Protocol) services segments.

Kerravala, for one, is betting that Cisco will acquire a company like IP service provider CoSine Communications (Nasdaq: COSN). He noted that Cisco is particularly weak in this area.

"CoSine is a technology leader in IP services, but because they are a little standalone company, they have a hard time selling the product," he said.

Cisco executives were unavailable for comment.