M&A Alert - May 20, 2010
Cisco Buys CoreOptics Inc.
Transaction Overview
On May 20, 2010, Cisco (NASDAQ:CSCO) acquired CoreOptics Inc. for $99 million in cash for all shares of CoreOptics, plus retention-based incentives.
Target Description
CoreOptics Inc. is an ASIC designer focused on digital signal processor (DSP) -based transponders for optical networking applications. With the advent of cloud-based computing, the necessity for high-speed fiber optic capabilities is increasing. CoreOptics currently manufactures 10 Gbps and 40 Gbps optical networking components and is developing 100 Gbps capable technologies. In March of 2007, the company successfully tested a 111 Gbps transmission over 2,400km and is currently developing technology to help companies upgrade their fiber networks to 100 Gbps. The Company was founded in 2001 and is based in San Jose, California with about 120 members working in Nuremburg and Stuttgart, Germany as well as San Jose, California. They have received financing from John Borchers of Crescendo Ventures, T-Venture, Atile Ventures, TUM Capital, GIMV and others. Their total venture funding was reported to be around $90 million.
Buyer Description
Cisco (NASDAQ:CSCO) is a long-time player in the networking and telcom equipment businesses. The company has leading market shares in routing, wireless LAN, switching, IPTV and web conferencing. The ONS 15454 is the flagship of the Cisco Optical portfolio, which includes core, edge/access, and DWDM platforms. Surya Panditi, the VP and general manager of Cisco’s Service Provider Access and Transport Technology Group, was the key executive sponsor in the deal. Their last optical acquisition was a $7.4 billion dollar deal for Cerent and Montgomery Networks in 1999, their largest transaction to date. Cisco was founded in 1987 by Len Bosack and Sandy Lerner.
Transaction Parameters
Cisco is paying $99 million in cash as well as management incentives in the acquisition of CoreOptics.
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| Enterprise Value1 | $99 million |
| Multiple of Invested Capital1 | 1.1x |
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1. Cisco Press Release May 20 2010
Strategic Rationale
The case for a systems vendor to acquire a component provider is not perfectly clear. Panditi was quoted as saying “With this acquisition, Cisco reinforces its commitment to continue to invest in its core networking business and to deliver networks at 100 Gbps and beyond.” Cisco has not had particularly strong optical products lately, and analysts speculate that this acquisition signals an intent to be more competitive against Alcatel-Lecent, Huawei and Ciena/Nortel by more tightly controlling the features and quality of a critical component.
Architect Partners’ Observations
1. Cisco is paying attention to core optical again – does this indicate that demand for OC768 networks is (finally) picking up?
2. This may be a precursor to increased vertical integration in systems vendors, as a way to offer proprietary features and to better control quality. But one acquisition a trend does not make.
3. The relatively low price paid (roughly 1x invested capital) does nothing to improve venture capital interest in ASIC deals, further slowing innovation.