Cisco's $7 billion optical plan

Declaring optical networking to be the next big thing, Cisco Systems has spent a dizzying $US6.86 billion on the private optical company Cerent and a further $501 million on Monterey Networks, which also makes fibre-optic gear.

When asked to explain why his company was spending some $US7 billion in stock to acquire a small optical networking company that hasn't seen black ink, Cisco Systems CEO John Chambers told an Austin, Texas, conference (as reported by Reuters), "We who understand our market understood that optical transport was going to explode and so our shareholders as well as industry analysts have been asking us for a while what we're going to do."

They got their answer Thursday with a double deal: $6.86 billion for Cerent of Petaluma, Calif., and $501 million for Texas-based Monterey Networks. Both companies make fibre-optic networking equipment.

Most outlets reported the unsupported claim that the Cerent deal is believed to be the most ever paid for a privately held technology company. "Cisco's sexy and hot right now, and they can basically do whatever they want," Laurie Gooding, senior analyst at Cahners In-Stat Group told Wired's Joanna Glasner.

Cerent CEO Carl Russo told CBS MarketWatch's Mike Tarsala how Cisco and Cerent benefit from the deal. Cisco's gain is that it puts them in better position to take on Lucent, Nortel, Fujitsu and Alcatel. The tradeoff for his company is that in exchange for giving up independence it becomes a player. "Let's face it: Mike Armstrong, chief executive of AT&T, will return John Chambers' call before mine." Now, the company will have clout. And $7 billion, of course.

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