Cisco Buys Andiamo Finally

Cisco Systems Inc. (Nasdaq: CSCO) has finally closed its acquisition of Andiamo Systems Inc., the "spin-in" startup that developed Cisco's MDS 9000 series SAN switches (see Cisco Wraps Up Andiamo Deal). Cisco's marking the official acquisition by putting its storage gear under the umbrella of its Internet Switching Business Unit.

To start at the top: Cisco has spent about $750 million in an all-stock transaction to complete its ownership of Andiamo -- a bargain, considering the company was prepared to go as high as $2.5 billion worth of Cisco shares (see Cisco Buys Andiamo).

Three years after Cisco's interest in Andiamo came to light (see Ciscos Secret SAN Strategies Revealed), and nearly two years after Cisco's first products were announced (see Cisco Announces Andiamo Switches and Cisco to Christen Andiamo Family), the switches developed by Andiamo are definitely a market Go. In Cisco's latest earnings report, the company claimed $40 million in revenues related to the MDS 9000 and boasted 540 customers for its storage group (see Cisco Storage Growing Up).

In addition, Cisco CEO John Chambers has earmarked storage networking as one of six "billion-dollar babies" in the Cisco product repertoire (see Storage: A Cisco Billion Dollar Play).

So Cisco's done the expected. What changes now? For one thing, Andiamo's official entry into the Cisco fold (it's been living on the Cisco campus since its inception) is marked by a change in Cisco's storage networking organization. Andiamo's 317 employees are joining Cisco's Internet Switching Business Unit (ISBU), the group that handles Cisco's Catalyst series switches, which is headed by senior VP Luca Cafiero.While Cisco was unable to disclose the number of employees in the unit at press time, it is the company's largest product group, and a particularly strategic one, given its focus on metro and access networking, and all things Ethernet.

The melding of storage networking within ISBU is seen as part of Cisco's aim to have an "integrated data-center offering," according to Jacqueline Ross, VP of marketing at Andiamo, who now will be taking a VP post at ISBU. "What we were seeing within data centers are a number of core products, including intelligent switches with Catalyst core routing. ISBU already had the front end -- now they have the back end, too," Ross says.

Andiamo's cofounder and CEO, Buck Gee [ed. note: whiz!], will be VP of operations for storage within ISBU, Ross says. Other leading engineers at Andiamo, so far unnamed, will also be taking up residence as ISBU VPs.

Cisco always said it would base the purchase of Andiamo sales on its ability to produce revenues for the mothership. Indeed, Cisco's "spin in/buy back" approach, designed to minimize risk to Cisco and compensate Andiamo execs, including Ross and Gee , appears to have worked like a charm (see Cisco's Creative Andiamo Options).

Separately, Cisco's shelled out $184 million ($84 million in covertible debt, $100 million in non-convertible debt) to help the startup meet development costs, according to Cisco's latest filing with the Securities and Exchange Commission (SEC). Cisco plans to have a full description of the final buy in its SEC filing for the quarter ended May 1, 2004.Up to now, Cisco's owned 44 percent of Andiamo, based on a transaction in August 2002, during which Cisco outlined its plans to buy Andiamo "no later than July 31, 2004." And so it has.

Cisco used a formula to arrive at the $750 million figure that includes a full year of estimated Andiamo earnings, plus a market cap multiple applied by Cisco. The value of both components of the purchase price weren't available at press time.

— Mary Jander, Site Editor, Byte and Switch