The San Jose, Calif., computer networking giant says it will pay $89 million in cash for the brain power at upstart router maker
. The deal involves the acquisition of intellectual property, some unspecified assets and the hiring of most of the engineers at the closely held Milpitas, Calif., tech shop. Cisco expects the deal to close by late summer or early fall.
Speculation about the deal had circulated widely in recent weeks. Cisco chief John Chambers had been quoted in several published reports saying he wasn't shopping for a new router and that he "could not be more comfortable with our routing strategy."
But industry observers say Thursday's deal shows that Cisco isn't comfortable with its routing performance, a notable admission for the longstanding industry leader.
Last month, Cisco unveiled its long awaited, oft-delayed
big new router called the CRS-1, an answer to rival
large routing machine. Routers are Internet traffic sorters used to connect and manage computer networks. Cisco had hoped that the CRS-1 would give it entree to the telecom spending party, but indications are that the going has been slow.
"This has to be a concession on Cisco's part that they have had problems with the big router," says industry analyst Sam Greenholtz with Telecom Pragmatics. "Procket had a better product. It was more technically advanced than Cisco and it was gaining traction in the market."
Cisco certainly had kind things to say about its new partner. "Procket has some of the world's foremost designers of sophisticated silicon, software and network systems, with an average of over 15 years of experience in their respective industries," the company said.
The move brings some of Cisco's former brightest back into the fold, as some of Procket's top engineering talent hails from San Jose. Procket was founded by a former Cisco scientist, Tony Li, and CEO Roland Acra used to run Cisco's telecom business.
As always, the deal comes as Wall Street wonders what Cisco will do with its massive cash hoard and where the company will find growth to reward investors. In recent years, Cisco has spent much of its abundant cash flow buying back shares to offset employee option issuance, but robust sales growth continues to elude the company.
On Thursday, Cisco shares fell 33 cents, or 1%, to $23.55.