Why Cisco paid $475m for Intucell

The answer lies with AT&T, and a new strategic direction for the US giant.

The man who signed the check to acquire Intucell Ltd. yesterday was Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers, but four-year-old Intucell owes its phenomenal success to someone else entirely. He is John Donovan, EVP technology and network operations at AT&T Inc. (NYSE: T).

Although AT&T has one of the greatest foundations of innovation the world has ever known - Bell Labs - the company apparently decided it needed greater efforts and a change in its corporate culture to inject new processes and technologies to improve its performance.

Donovan, who joined the company in 2008, was behind the initiative to establish three innovation centers under the name of AT&T Foundry: one in Texas, one in Silicon Valley in California, and one in Ra'anana, Israel. In early 2011, Intucell co-founder and CEO Rani Wellingstein came to the Ra'anana Foundry to attend a round of get-to-know meetings Donovan held with Israeli communications start-ups. The meeting was apparently so impressive that Donovan decided almost immediately to adopt Intucell's solution for optimizing mobile networks. A year later, he helped Intucell secure an agreement with AT&T worth tens of millions of dollars, which was ultimately responsible for bringing Intucell to the attention of Cisco, and for Cisco's willingness to pay the hefty sum of $475 million for it.

"Our interest in this company is a combination of its technology, which is extraordinary in the sector, and the speed of its deployment at AT&T, which is exceptional," says Micha Porat, who is responsible at Cisco for investment and acquisitions of solutions for mobile carriers. "This amounted to a stamp of approval for us about the company's capability and affirmed our assumption that it is possible to scale up these solutions massively. The agreement with AT&T was very significant in many ways, including financially, of course. This is the only company in the world with a technology deployment in this field on a large network."

Wellingstein's career has for years been in the telecommunications equipment industry, but this is not enough to explain the deal with Cisco. He joined ECI Telecom Ltd. in the late 1990s, when it acquired a NKO, an IP telephony company where he worked. At ECI, he was in contact with service providers in North America, where he may have acquired his knowledge about building companies. In 2000, he and three others co-founded Celltick Technologies, a mobile broadcast solutions developer.

In 2008, Wellingstein teamed with Ido Susan to found Intucell. Susan, now 26, is a big mystery. In fact, very big - at 26, he will make NIS 300 million before taxes. Intucell operates in the services vendor space, although it entered the field from a completely different direction from Wellingstein's previous companies. Intucell provides self-organizing network (SON) solutions to optimize network performance automatically. The company's technology - smart software based on algorithms - enables mobile carriers to tune their networks in real time on the basis of user demand and network traffic.

The huge growth in data traffic by mobile phone users, especially video and other multimedia content, forces mobile carriers to deal with extraordinary loads on their equipment. Coping with this load, which has become critical with the introduction of 4G, LTE and higher networks, means trying to balance network loads while dealing with bottlenecks. Some solutions help mobile carriers by channeling traffic to parallel networks, such as WiFi or fiber optics where possible, while others deal with the problem through more sophisticated traffic management.

Reducing loads

The change Intucell made at AT&T apparently did the trick. In a report a few months ago about initiatives adopted by the company, it said that Intucell's solutions helped it reduce traffic overload at communications towers by 15%. This was apparently good enough: Intucell added more than ten service providers as customers, in addition to AT&T.

The acquisition is an important step for Cisco, not just strategically, but also geographically. Cisco has three acquisition options: buying a new platform for billions of dollars, such as NDS; buying products for hundreds of millions of dollars; and buying quality personnel and/or intellectual property. Most of its acquisitions in Israel over the years - nine since 2005 - belong to the third category. The acquisition of Intucell is somewhere between the first and second category.

Cisco is acquiring a key platform for strategic entry into a new market where Alcatel-Lucent SA (NYSE; Euronext: ALU), Ericsson (OMX; Nasdaq: ERIC) and other companies are the leaders. Doing this in Israel is part of a decision to restore its Israeli center to the center of operations at the company. "The acquisition will create a critical mass here," says Cisco VP corporate development Yoav Samet. "Israel now has more and more opportunities to create an important footprint for the company. This demonstrates that we make are making a real bet on our center in Israel."

Cisco corporate development manager Tal Slobodkin says, "This is a new group, which we intend to invest in to turn it into something very significant for Cisco."

Published by Globes [online], Israel business news - www.globes-online.com - on January 24, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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