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CISCO TO BUY STORAGE SWITCH MAKER

Cisco Systems Inc, a leading maker of equipment that directs Internet traffic, has said it will buy privately held Andiamo Systems Inc to expand its presence in the storage switch market.

Cisco said the net price could be as much as $2.5 billion and will not be determined until shortly before closing. SG Cowen analyst Christin Armacost expects the deal to close somewhere between $300 million and $1 billion.

Andiamo's switch products are used to route information in computer networks that store and share company data. The deal gets Cisco into the fiber channel storage area networking switching 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 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 company would acquire eight to 12 small- to medium-sized companies this year.

Analysts said the additional revenues will be small at first, but the move is a positive one.

"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 (deal) 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 in the past on acquisitions.

The closing price will be based on Andiamo sales during a three-month period shortly before closing as well as Cisco's sales and market capitalization, Cisco said.

Cisco already holds an Andiamo convertible note, for which it said it will invest $84 million, that will convert into 44 percent of Andiamo equity at closing. It has invested $74 million of that total.

The deal is expected to close in the third quarter of Cisco's 2004 fiscal year ending in April 2004, but no later than July 31, 2004, the company said.

"This acquisition supports Cisco's strategy to enter into new growth markets, such as storage networking, where we believe we have the potential to be the number one or two player," Chambers said in a statement.

The deal has been approved by both companies and is subject to various closing conditions and approvals, Cisco said.

Cisco's stock fell 4 cents to $14.68 Tuesday on Nasdaq. It has fallen almost 19 percent so far this year, compared with a 60 percent decline in the sector's American Stock Exchange Network Index.

In connection with the deal, Cisco also announced the lineup of storage switches developed by Andiamo, which are expected to be available during the fourth quarter.

In 2001, Cisco signed a deal that give it the right to acquire Andiamo, which was founded in January 2001 and employs about 270 people.

Cisco said in a filing with the U.S. Securities and Exchange Commission it will provide Andiamo with an additional $100 million in funding through the close of the deal.

Cisco said last month it would buy the rest of privately held Ayr Networks Inc, a maker of networking services and routing software, for up to $113 million in stock. In June, Cisco closed deals to buy two other firms for $258 million in stock.