Sheer Delight for Cisco

Having raised the hopes of nearly every privately held networking security vendor with its recent acquisition splurge in that sector, Cisco Systems Inc. (Nasdaq: CSCO) has turned its M&A attentions to OSS (see Cisco Nets NetSift for $30M, Cisco Buys Startup for $1.2M per Employee, and Cisco Chomps FineGround).

Today Cisco said it's buying network management specialist Sheer Networks Inc. for an initial sum of $97 million in cash and assumed options (see Cisco Buys Sheer Networks).

That sum could go up by a further $25 million if unspecified development and product milestones are met. Maybe Sheer, which peddles service fulfillment, fault management, and auto-discovery software tools for IP networks, will be given a target of 90 days to transform itself into a security company if it's to get the extra greenbacks… (See Sheer Offers Triple Play OSS, Sheer Intros BOS for IP Networks, and Sheer Supports IP-VPN Services.)

So, Cisco could possibly pay $122 million for an OSS company with annual revenues "way less than $30 million," according to OSS Observer analyst Patrick Kelly. "That seems like a very high premium to me."

Kelly notes that Sheer "stumbled a few years ago and changed its top management, and his since won a couple of carrier deals." (See Ghez Who's Sheer's New CEO, Sheer Bags Telmex OSS Deal, and Korea Telecom Uses Sheer OSS.)

Another industry source, who requested anonymity, suggests that Sheer's revenues are nearer $10 million a year, that it doesn't have too many carrier accounts, and that it has raised between $60 million and $70 million in VC backing. He also believes Cisco may have invested in Sheer some years back, and that the IP networking giant has had "good visibility into Sheer for some time."

But Kelly says the main question is how this acquisition might affect some of the relationships Cisco has with other OSS companies, such as Micromuse Inc. (Nasdaq: MUSE), EMC Smarts, and Intelliden Corp.

The industry source agrees that "this could cause companies such as Intelliden some problems, as their technology supports similar functions," and says this move could make sense for Cisco if it helps the equipment company provide "a more standard software interface for its many hardware platforms." Intelliden didn't return calls seeking comment as this article was published.

Sheer's executives also didn't return calls for this article. The company's most recent round of funding, its fourth, was announced in May 2004, and several news reports pegged that round at $15 million (see Sheer Networks Gets New Investment). The company's investors include JK&B Capital, Rein Capital, Star Ventures, and Jerusalem Venture Partners.

When Sheer announced a $30 million funding round in September 2000, its listed investors included former Oracle Corp. (Nasdaq: ORCL) president Ray Lane and "a large global Internet infrastructure vendor." Industry reports list Nokia Corp. (NYSE: NOK) and 3Com Corp. (Nasdaq: COMS) as Sheer investors.

Cisco's announcement says Sheer has 100 staff based in San Jose, Calif., and Petach Tikva, Israel, and that the team will report to the head of Cisco's Network Management Technology Group, Cliff Meltzer.

Cisco says Sheer's technology approach, based on a model that abstracts multiple networks into a single virtual model, suits the requirements of its service provider customers and its own common services management platform approach. Cisco says it plans to use the Sheer platform to develop new network and service management applications.

Cisco hadn't returned calls about the impact of the acquisition on other OSS vendor relationships.

— Ray Le Maistre, International News Editor, Light Reading