Pirelli embarks on the future by 'getting back to its roots'

May 1, 2000

A strategic alliance between Pirelli SpA (Milan) with Cisco Systems Inc. (San Jose, CA) late last year sent speculation running throughout the optical-communications industry. Perhaps the alliance announcement being made in conjunction with the sale of Pirelli's terrestrial optical-systems business had something to do with it.

Cisco acquired Pirelli's optical-systems business for an aggregate consideration of Cisco common stock of up to $2.15 billion. The benefits for Cisco included its entry into the optical-transport market, particularly the dense wavelength-division multiplexing (DWDM) market. The move, according to Chris Nicoll, an industry analyst with Current Analysis (Sterling, VA), also enabled Cisco to remain competitive with the likes of Lucent Technologies (Murray Hill, NJ) and Nortel Networks (Brampton, ON).

Cisco's objectives were clear, but what would Pirelli gain in return from either the sale of its assets or the strategic alliance? The Cisco investment of $100 million in Pirelli's optical components and submarine optical-transmission-system businesses seemed dwarfed by the benefits Cisco achieved from the deal. But Pirelli has its reasons for the deal.

"We want to focus our attention and assets on our core businesses-the manufacture of optical components and optical submarine systems," says Giuseppe Morchio, chairman and chief executive officer at Pirelli. "These core businesses are the fastest-growing segments of the optical industry and where Pirelli has always been successful."

Morchio says the company has built a strong global presence in the "optical value chain" that is made stronger by the powerful synergies originating from its alliance with Cisco. With more than 80 exclusive patents in the production of optical products, Pirelli will now focus specifically on the photonics matrix.

"A new opportunity exists within a fast-growing market segment for Pirelli's innovative components, including the entire range of active fibers for erbium-doped fiber amplifiers, gallium arsenide 980-nm pump laser technology, lithium niobate modulators for high bit rate transmitters, and grating technology for dispersion compensation," says Morchio. "We can also provide high-tech functional modules, such as optical-amplifier gain blocks, optical multiplexers, demultiplexers, and add/drop devices able to perform ad vanced system functions."

Pirelli also announced plans to expand its optical components and modules markets further into the United States by creating a new U.S.-based company. The newly incorporated company will establish a legal office in Delaware, while its production activities will likely be based in California. Recent strategic plans also call for the formation of a new company to build on Pirelli's numerous patents in the field of submarine optical systems.

In a new undertaking called the "e-Pirelli Project, " the company will develop and enhance its optical components and systems activities through what it calls "e-technology"-the ability to leverage the benefits of the Internet. Future plans, says Morchio, could also include more strategic alliances and technological partnerships with primary companies, much like the Cisco deal.

The company is getting back to its "roots"-optical components, modules, and submarine systems-with intentions of strengthening its presence worldwide in those key areas. "Pirelli needed a major networking partner that could supply a stronger worldwide presence, end-to-end solution support, and fund additional research and development investment and sales financing," says Nicoll. "Cisco fills these requirements nicely."

"With regard to optical components and modules, Cisco's supply agreement offers Pirelli the high growth potential of the requirements of the Internet technology leader," says Morchio.