Feature Story

Nuova Systems Acquisition Marks Another Major Step in Cisco's Data Center Efforts

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Cisco CEO John Chambers explains significance of the company's 126th acquisition

April 8, 2008

Cisco's CEO John Chambers

Today, Cisco Systems announced its intent to purchase Nuova Systems, a San Jose, Calif. start-up specializing in high-performance data center networking equipment. According to Cisco's chief executive John Chambers, the company's 126th acquisition marks another major milestone in Cisco's efforts to create a new and far more efficient architecture for data centers. The Nuova Systems acquisition not only officially brings into the company an impressive portfolio of technology but also some of the industry's most experienced data center networking experts, including several former Cisco executives. Chambers says the company's latest purchase and its unique "spin-in" structure is an exceptional example of Cisco's business strategy, which uses a combination of internal development, acquisitions, and partnering to innovate and take advantage of market transitions.

The first product from Nuova Systems is a 10-gigabit Ethernet switch that supports "unified fabric" and "virtualization" services—promising capabilities for improving how the various servers in a data center communicate and share computing resources. Developed in close collaboration with Cisco's data center engineering team, the Nuova switch uses key Cisco technologies, including the company's new Nexus operating system (NX-OS). Cisco will re-brand the Nuova switch as the Nexus 5000 series, joining Cisco's recently announced Nexus 7000, a large and super fast machine for simplifying data center operations through infrastructure consolidation and more efficient resource use.

"Combined with our internal engineering group, I believe Nuova Systems will make a dramatic contribution to transforming data center operations."

John Chambers

Cisco initially invested in Nuova Systems in August 2006 and currently owns 80 percent of the company, representing a $70 million total investment. Prior to completion of this acquisition, Nuova operated as a majority-owned subsidiary of Cisco. In conjunction with its initial investment, Cisco and Nuova entered into a call-option agreement that gave Cisco the right to purchase the remaining 20 percent of Nuova stock. Cisco will now execute this option. The final purchase price will be based on revenue generated by Nuova products and the margins associated with such revenues, with a minimum payout of $10 million and a maximum payout of $678 million.

News@Cisco spoke with Chambers about the Nuova Systems acquisition and the significant benefits it offers Cisco and its customers.

Cisco has acquired 126 companies since 1993. What makes the Nuova Systems acquisition particularly important?

John Chambers: Out of the 126 acquisitions we've done, there are probably less than a dozen that signaled a major market transition for Cisco. Some of these milestones include Crescendo in the switching market, Scientific Atlanta in the service provider market, and WebEx in the collaboration and Web 2.0 categories. Nuova's product pipeline-which extends well beyond the Nexus 5000—has the potential to be the catalyst to another significant market transition for Cisco.

Why did Cisco go outside the company to develop this type of product?

John Chambers: First, let me start by saying that I could not be more pleased with Cisco's engineering teams. They continue to create a vast array of the industry's most innovative products. That being said, our business model has always been to "build, buy, and partner." No global company can lead an industry with internal innovation alone. And given the number of markets and product lines we now develop, often it's not a question of if we can do it ourselves, it's more a question of how many things we can do at one time. I think the Nuova Systems acquisition is an instance where we get the best of both worlds. By tapping into Nuova's impressive engineering team to complement our internal efforts, we will be able to quickly bring major new products to the data center market.

Beyond Nuova Systems' first product, the Nexus 5000, how else do you expect this acquisition to influence Cisco's data center product line?

John Chambers: The Nexus 5000 is just the first product in a rich technology portfolio that the Nuova team has been developing. While I cannot pre-announce other products, I can say without hesitation that I expect the Nuova acquisition to have a profound influence on our data center business. Combined with our internal engineering group, I believe this team will make a dramatic contribution to transforming data center operations. The key customers and partners we have briefed on our plans have been very enthusiastic. Everyone is eager to see these products in action.

Why did Cisco use a spin-in strategy to acquire Nuova Systems?

John Chambers: Cisco has literally written the book on technology acquisitions. To maintain this strategic advantage, we continually explore new ways to acquire companies and bring new technologies and talent into Cisco. In the case of Nuova Systems, the advantage of a spin-in is that you can jointly develop well-integrated products by closely sharing your technology, expertise and product roadmaps. The acquired technologies of a spin-in become part of Cisco's technology architecture in a much shorter time than with traditional acquisition methods.

Secondly, a spin-in allows Cisco to tie an acquisition price to product revenues and the margins associated with those revenues. This results-oriented approach avoids the typical challenges of estimating the value of an acquisition. This, to me, has the potential to be a superior way of doing acquisitions.

Talent is often the most important asset of an acquisition. What are the strengths of Nuova's engineering team?

John Chambers: Well, as I've alluded to, Nuova's group of 200 employees is extremely impressive. Many of the company's engineers and executives have helped bring dramatic technological improvements to the computer and communications industries. The group includes some Cisco veterans, as well as several prominent executives from the virtualization, server and storage industries, including Ed Bugnion and Tom Lyon. Bugnion, Nuova's chief technology officer, is the founder of VMware, one of the industry's leading makers of virtualization software for data centers. Tom Lyon is the founder of highly regarded switch maker Ipsilon Networks [acquired by Nokia in 1997]. These individuals have proven themselves as some of the industry's most influential leaders. So, in short, Nuova's talent makes me very optimistic that this acquisition will bring major benefits to both Cisco and its customers.