Cisco re-strolls down acquisition lane

Cisco Systems has followed through on plans to buy two companies for up to $258m to improve its IP networking technology. And two more acquisitions may be in the works, according to a recent company filing.

The Internet equipment giant said on Wednesday that it has agreed to buy privately held Hammerhead Networks for up to $173m in stock, and Navarro Networks for up to $85m in stock. Both deals are expected to close by the end of Cisco's fourth quarter.

The purchases were previewed in Cisco's most recent quarterly filing with the Securities and Exchange Commission in March, when it said it could pay up to $500m for three companies sometime before September and as much as $2.5bn for a fourth company before July 2004.

Cisco, once one of the most acquisitive US companies, has seen its deal-making pace cool along with the economy. The company has also been struggling to keep up with smaller rivals such as Juniper Networks and Unisphere Networks as the router giant has lagged in software development. Investments in new technologies through smaller, private companies are part of its plan to challenge the competition.

Hammerhead's software will add to Cisco's roster of cable, broadband and leased-line products. The company makes technology to speed the delivery of multiple IP services such as billing and security without affecting the speed of other networked functions. Hammerhead chief executive Eddie Sullivan will join the Cable Business Unit in Cisco's Network Edge and Aggregation Routing Group.

Navarro, of Plano, Texas, makes ASIC (Application Specific Integrated Circuit) chips, which are custom-designed for a specific application and improve performance over general-purpose chips. Navarro's design expertise will be used to improve Cisco's Ethernet switching technology, the companies said. Chief executive Mark Bluhm will join the Internet Systems Business Unit in Cisco's Internet Switching and Services Group.

The two purchases will require Cisco to take a one-time combined charge for purchased in-process research and development costs of up to 2 cents a share in fiscal year 2002.

In its March SEC filing, Cisco said it has been expensing some of its funding of the four companies as research and development costs. Of the three companies it could acquire before September, Cisco said it expensed about $29m of its funding as research and development; for the fourth company, Cisco expensed $38m of its funding as research and development.

If the fourth company exercised its "put option" and Cisco acquired it, Cisco would have to provide it with additional funding of up to $100m.

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