Cisco to Buy Storage Switch Firm Andiamo

Cisco Systems Inc., the No. 1 maker of equipment that runs the Internet, said Tuesday that it will buy Andiamo Systems Inc. but won’t close the deal until 2004, waiting to see if the small start-up can become a top player in the data storage switch business.

Cisco said the net price could be as much as $2.5 billion but the final price, based on Andiamo’s sales, will not be determined until the deal closes. SG Cowen analyst Christin Armacost estimates the deal could be valued between $300 million and $1 billion.

The wide range of the deal’s possible closing price will be based on Andiamo’s sales during a three-month period shortly before closing, and on Cisco’s sales and its stock price.

Andiamo’s switch products are used to route information in computer networks that store and share company data. Andiamo, which started operating less than two years ago, has recorded no revenue to date and just unveiled a line of products.

Cisco is betting that privately held Andiamo’s sales will take off, allowing it to grab a piece of the market, which is expected to grow from about $1.2 billion this year to $4.3 billion in 2006, the company said, citing Gartner Group data.

“It’s definitely incremental revenues,” Merrill Lynch analyst Samuel Wilson said. “Cisco right now has two storage products ... which have been relatively ho-hum. This gets them head to head in the storage switch market, which is where Brocade [Communications Systems Inc.] and McData [Corp.] play.” Merrill Lynch has advised Cisco on past acquisitions.

It is the fourth acquisition of a small, privately held firm announced by Cisco this year. Cisco President and Chief Executive John Chambers has said the firm will acquire eight to 12 small to medium-sized companies this year.

Alex Vallecillo, senior portfolio manager with Armada Funds, which owns Cisco shares, said the San Jose company wants to pressure competitors.

“Clearly, it’s going to be a black cloud hanging over Brocade,” he said.

However, Dresdner Kleinwort Wasserstein analyst Ariane Mahler was skeptical about Cisco becoming a dominant player in a competitive market. In 2001, Cisco signed a deal that gave it the right to buy Andiamo, which employs 270 people and also is based in San Jose.

Cisco said in a filing with the Securities and Exchange Commission it will provide Andiamo with an additional $100 million in funding until the deal closes.

Cisco shares rose 1 cent to $14.73 on Nasdaq.