Cisco pays $US2b for Pirelli division

Cisco has agreed to acquire the optical networking systems division of Italy's Pirelli in a deal valued at more than $US2 billion, Pirelli said in a statement.

As part of the agreement, Cisco will also take a 10 per cent equity investment of $100 million in Pirelli's newly formed optical components division and submarine optical transmission systems division, the statement said.

The acquisition is only the latest from Cisco in the area of fibre optics. In August it agreed to pay a total of $7.7 billion to acquire startups Cerent and Monterey Networks. On Friday last week, it said it would pay $25 million to acquire Internet Engineering Group (IEng), a privately held company that makes high-performance software for controlling optical networks.

Pirelli said the deal with Cisco will strengthen its position in the US market and help boost revenues for the Italian firm's cables and systems division.

Twenty per cent of the $2.15 billion acquisition price will be contingent on the Pirelli division reaching certain revenue targets and other performance milestones, Pirelli said in the statement.

Payment for Pirelli's terrestrial optical networking systems division will be made in Cisco shares when the deal is finalized in just over a month, said Pirelli Group chairman and chief executive officer Marco Tronchetti Provera. Pirelli will receive shares amounting to 1 per cent of the US company's equity, he said, adding, "We expect to sell most, if not all of the shares."

"This agreement enables Cisco to strengthen its presence in the submarine systems and optical components sectors, a market which is expected to grow by 30 per cent over the next five years," a Pirelli spokeswoman said. "It also brings fresh investment and valuable technology transfers for Pirelli."

"The two companies have complementary strengths and there will be technological benefits for both partners," said Roberto Mastropasqua, telecommunications research manager at International Data Italy in Milan. "Pirelli is well positioned in the dense wave division multiplexing (DWDM) market, which will provide the major transmission backbones of the future. Optical transmission using Internet protocol (IP) networks is the platform of the future and this agreement enables Cisco to position itself for the future of networking."

DWDM is an innovative technology that uses different color light waves instead of electronic pulses to increase the capacity of broadband networks carrying a combination of phone, Internet and video traffic. Cisco's purchase of Pirelli's optical systems is the company's first multibillion dollar acquisition in Europe and its first entry into the DWDM market.

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