Cisco Systems Inc has closed its purchase of Andiamo Systems Inc, paying a handsome $750m in stock for the spin-in that spun the networking giant into the storage market where its progress has not yet set any records.
Andiamo was founded with Cisco investment in 2001, since when Cisco has had an option to buy the company outright. The price was determined according to a formula based on sales of Cisco’s Andiamo-developed SAN gear that could have seen Cisco pay around a $2.5bn for Andiamo, and which was set two years ago.
Last week Cisco said the final price paid to Andiamo was approximately $750 million net of Cisco’s ownership and certain adjustments. Cisco previously owned 44% of Andiamo. The setting of the price around one year after the first product was launched was according to plan, Cisco insisted.
Since its SAN products were launched, Cisco’s progress in the storage market has been respectable but a little disappointing. The company now owns around 10% of the overall SAN market, which last year was worth around $1bn in factory revenue.
Fibre Channel gear from different suppliers does not mix that well, and this has created a degree of vendor lock-in that has helped lock Cisco out. Despite heavy price cuts, Cisco’s SAN sales did not double during last summer as its CEO John Chambers forecast.
As a result the return on Cisco’s investment in Andiamo will take some time to be realized. Cisco’s last fiscal quarter was its best yet for SAN sales and according to the company’s own estimate saw a quarterly run-rate in the low $30m range. That was up around 70% sequentially during a seasonally strong year-end quarter.
Jackie Ross, vice president of marketing for the Storage Business Unit at Cisco stressed that although Cisco launched its SAN products around a year ago, key qualifications by storage OEMs were only completed at the end of last June, and said that Cisco accounts for 15% of sales into the high-end director market, on which it focused first.
The calculation of the purchase price was based on sales during a period that was only two weeks different to Cisco’s latest fiscal quarter ending 24 January 2004. We took an annual run-rate of $150m, and multiplied that by five, Ross said.
Andiamo developed for Cisco not only standard Fibre Channel switches and directors, but also switches with multi-protocol support, and the ability to host third-party storage applications. So far this latter smart switching ability has not set the market on fire. HP has shelved plans to port its virtualization software to Brocade’s smart switch, and Veritas says it only expects a slow pickup of its software running on Cisco’s gear.
The SAN market has been one of the major reasons for rapidly falling prices in the sector. The other reason has been that the incumbents McData Corp and Brocade Communications Systems Inc have in the last year hugely stepped up their efforts to compete with each other across both the mid-range and high end of the market.
This article is based on material originally published by ComputerWire