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Cisco's acquisition of Acacia bolsters service provider offerings

Cisco plans to buy Acacia for $2.6 billion. Cisco's acquisition will make it a direct supplier of optical interconnects for the data centers of carriers and service providers.

Cisco plans to acquire Acacia Communications for $2.6 billion, a move that would make Cisco a direct supplier of packet-optical transport systems for carrier networks and organizations that connect data centers across hundreds of miles.

Cisco announced the pending purchase on Tuesday in a joint statement with Acacia, based in Maynard, Mass. The companies expect to close the Cisco acquisition in the first half of next year.

Cisco offers Acacia's packet-optical transport systems (P-OTS) with networking gear it sells today to carriers, cloud service providers and the largest enterprises. Cisco rivals Juniper Networks and Huawei are also Acacia customers, and analysts expect them to eventually turn to other P-OTS suppliers, such as Ciena, Inphi and Nokia.

"If I'm a Juniper or a Huawei, why would I buy from Cisco?" said Rajesh Ghai, an analyst at IDC.

Bill Gartner, general manager of Cisco's optical systems groupBill Gartner

Nevertheless, Acacia customers can expect from Cisco the same level of support that they receive today and equal access to products, said Bill Gartner, general manager of the vendor's optical systems group.

"If we're going to make this successful, we have to make sure that we're providing the technology to third parties that they want to consume at the time they want to consume it and at the right performance and price point," Gartner said. "I don't think we could make this successful more broadly if we give Cisco preference on any of those parameters."

Reasoning behind Cisco acquisition

Cisco has agreed to acquire Acacia because the company's optical interconnect technology will let Cisco help customers design networks that can keep pace with the projected increase in data traffic. Cisco has predicted that annual global IP traffic will increase from 1.5 zettabytes in 2017 to 4.8 zettabytes by 2022. Contributors to the traffic surge include internet growth, video content delivery and emerging next-generation wireless technology to support more demanding business applications.

Today, Cisco's proprietary optical transport technology ends in the data center, where analysts expect port speeds of 100 Gbps and 400 Gbps to become commonplace over the next couple of years. To meet that emerging demand, Cisco this year completed the $660 million acquisition of silicon photonics company Luxtera.

With Acacia, Cisco will also own the optical technology for service providers that need high-speed connections for metropolitan area networks or data centers as far as 1,500 miles apart.

"Our optics business today is primarily addressing what's happening inside the data center -- short-reach optics," Gartner said during a conference call with financial analysts. "We don't have a portfolio today that addresses what happens outside the data center for pluggables."

Acacia's portfolio includes pluggables, which are optical modular transceivers that vendors can sell as a plugin for a router or switch. The pluggable architecture, which is in its infancy, promises to simplify upgrading and repairing transceivers in networking gear.

John Burke, an analyst at Nemertes Research, based in Mokena, Ill., said Acacia could help Cisco "stay dominant in large data center markets long term," while also providing some technical advantages over Arista, Juniper and Huawei.

"I suspect it will also give a boost to some smaller optical companies and trigger at least one more acquisition -- perhaps by Arista," Burke said.

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