January 12, 2005 3:36 PM PST

Cisco buys wireless start-up for $450 million

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Cisco Systems will buy wireless switch start-up Airespace in a stock deal worth about $450 million, the companies said Wednesday.

The acquisition, subject to regulatory approval and other standard closing conditions, is expected to close by April 30.

Rumors of the acquisition, first reported by CNET News.com on Jan. 5, heated up last week.

Though Cisco already has its own wireless LAN (local area network) products and currently dominates the market with a share that's more than 50 percent, the Airespace deal makes sense, analysts say, because of a trend away from the distributed architecture style Cisco's technology has favored.

"Cisco realizes the market is shifting," said Frank Dzubeck, CEO of Communications Network Architects, a consultancy in Washington, D.C. "They needed to change their architecture. They could build it themselves, but their delivery of product into the market from internal development is longer than any other company."

Airespace makes switches and access radios to build wireless local area networks based on Wi-Fi, the 802.11 standard. Businesses use the technology to connect workers to the Internet wirelessly rather than through an Ethernet cable. Airespace's products use a centralized approach that uses "smart" switches to control "dumb" radios, rather than enabling each radio as a smart device.

Airespace and other start-ups such as Aruba Wireless Networks and Trapeze Networks claim that by centrally controlling and managing access points, they can expand the network more cost-effectively and provide security such as network authentication.

Hooper downplayed the idea that the purchase buoys a weakness in Cisco's line.

"We are pleased with our enterprise wireless LAN business today," Hooper said. "But as interests of our customers evolve, the Airespace products will allow us to offer a breadth of capabilities that when combined with our own products will make us a stronger player."

Cisco had already started to move toward a more centralized wireless architecture. In May, it introduced a new line card for the Catalyst 6500 switch that provided some wireless functionality. But Dzubeck and other critics say it still doesn't offer the same manageability and security as products from Airespace and others.

The deal also continues a trend toward consolidation, which began late last year when Siemens bought another wireless LAN start-up, Chantry Networks.

Cisco will gain some market share with this acquisition. According to the Dell 'Oro Group, Airespace had about 7 percent of wireless LAN sales in the third quarter of 2004. It has sold its gear mostly through partnerships with resellers, including Alcatel, IBM, NEC and Nortel Networks.

Alcatel and Nortel compete directly against Cisco in IP networking. It's not yet known what will happen to these agreements once the acquisition is complete. Hooper said Cisco plans to honor all of Airespace's reseller arrangements, but whether Alcatel or Nortel decide to continue the relationships remains to be seen.

Cisco's last acquisition of this magnitude was in March 2003, when it bought consumer wireless device maker Linksys for $500 million.

After the deal closes, Airespace will join Cisco's Data Center, Switching and Wireless Technology Group, led by Senior Vice President Luca Cafiero. Airespace was founded in 2001 and has about 175 employees--all of whom are expected to be retained, Hooper said.

 

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