Cisco Buys Pirelli's Optical Systems Unit

Updated from 10:22 a.m. EST

Further justifying its reputation as an aggressive acquirer,

Cisco Systems

(CSCO) - Get Report

agreed Monday to buy the optical systems business of Italy's

Pirelli

(PIREY)

for $2.15 billion.

Cisco, based in San Jose, Calif., will also invest $100 million in the Milan-based cable maker's optical components and submarine optical transmission system businesses.

Cisco expects the purchase to result in a one-time charge against after-tax earnings of between 3 cents and 9 cents a share in the third quarter of fiscal 2000.

The acquisition is Cisco's first in Europe and puts the company squarely in competition with

Nortel Networks

(NT)

and

Lucent Technologies

(LU)

in the dense wave division multiplexing, or optical networking, market. The technology breaks up pulses of light into as many as 48 channels, or wavelengths, thus maximizing the capacity of existing fiber to carry Internet, phone and video traffic. Soon 96 channels will be available. The companies will compete to sell optical networking equipment to telecommunications firms like

Sprint FON Group

(FON)

,

MCI WorldCom

(WCOM)

and

Williams Telecommunications

(WCG) - Get Report

.

"This is an aggressive move on Cisco's part," said David Toung, an analyst at

Argus Research

. "It shows they want to be serious." He also called the $2.15 billion price tag "not unreasonable, considering they paid $7 billion in stock for

Cerent

which wasn't even public." He rates Cisco a buy and his firm does not participate in underwriting.

According to telecommunications analysis house

RHK

, Nortel commands a top market share of 37% in the $3.1 billion North American DWDM space, ahead of Lucent at 29% and

Ciena

(CIEN) - Get Report

at 14%. In fact, Ciena shares were down 1 3/8, or 2%, to 62 1/8 in Monday trading. "It's perceived as a smaller player in the market and now a big player is moving in," explained Toung.

Cisco will integrate the new business with the optical products and technology that it has already bought in the last 13 months -- including the $7.1 billion purchase of

Cerent

and $500 million of

Monterey Networks

in August and the $126 million purchase of

PipeLinks

last December.

The DWDM transport technology purchased from Pirelli allows traffic to travel along the fiber network, while the routing and switching technology acquired from Cerent, Monterey and PipeLinks allows that traffic to branch off the highway.

Cisco shares continued to surge on the news, rising 2 1/16, or 2%, to 101 3/4, close to its 52-week high of 103. Pirelli shares rose 2.5 euros, or 10%, to 2.77 euros on the Milan bourse. (Cisco closed up 3 9/16, or 4%, to 103 1/4, while Pirelli finished up 2.5 euros, or 10%, to 2.77 euros.)