By Erica R. Davis 7/27/2005
Deepening its stake in the carrier network management space, Cisco Systems Inc. agreed to acquire Sheer Networks, a provider of network management software, for about $97 million in cash and assumed options.
Over the next 24 months, the acquisition price may increase by as much as $25 million depending on development and product milestones, the companies said.
Sheer Networks raised about $55 million in venture capital from Star Ventures, JK&B Capital, Jerusalem Venture Partners, Rein Capital and Castletop Capital. The San Jose-based company's most recent financing was a Series C tranche in May 2004.
Jerusalem Venture Partner's return was between 3 and 4 times its investment, General Partner Allon Bloch said. "Given the market, it's a success."
Bloch said his firm first invested in the company's late 2000 Series B. The return was better after the Series C because Sheer's valuation was less in 2004 than in 2000.
Regarding Cisco's offer, the dilemma, according to Bloch, was whether to accept the offer or wait another two years for enough revenue to file an IPO. "It could have been a higher return, but that's higher risk," Bloch said.
Sheer's technology, directed at carrier networks, helps simplify the task of monitoring and maintaining complex networks. Run on a Linux platform, its software provides capabilities in the areas of inventory reconciliation, service assurance and service configuration for next-generation networks.
Moving into profitability in the first quarter of 2005, revenue was about $10 million for its first two quarters, Bloch said. Founded in 1999, the company has 100 employees, most in its Petach Tikva, Israel, office. After the acquisition, most of Sheer's staff will join Cisco's research and development site in Netanya, Israel, which currently employs about 500 people, said Cliff Meltzer, senior vice president of the Network Management Technology Group at Cisco.
Upon close of the acquisition, the Sheer Networks team will report into Cisco's Network Management Technology Group.
"Service provider customers have a large challenge to profitably manage their network," Meltzer said. The products will be fully integrated into Cisco's portfolio.
Cisco is developing its own new products, which it will combine with Sheer's capabilities for additional service provider management applications. Meltzer declined to say when the new products will be available.
Sheer's software provides a framework that acts as a mediation layer, isolating management applications from different devices. Each service provider has between 30 and 50 software management applications on its network, Meltzer said. The problem is when a new piece of hardware is introduced, like a router, the service provider has to make sure each software application is upgraded to support the new router. This is time-consuming and complicated, Meltzer said. But Sheer's technology aims to simplify that with its mediation layer.
During the telecom crash, Sheer Networks survived 2001 and 2002 by securing a large amount of venture capital, cutting down the burn rate and focusing on key customers, Bloch said.
About 18 months ago business started to pick up, as service providers began to deploy IP services and needed help in fault detection and provisioning. "What we saw is once companies implemented Sheer, every time they added a new application, they went back to Sheer," the investor said.
A few of the start-up's customers are Bell Canada International Inc., Telefonos de Mexico S.A., Singapore Telecommunications Ltd., and SBC Communications Inc.
The acquisition is expected to close by the end of October.
