Targeting the full spectrum of companies wanting to run their growing e-businesses over an Internet-based virtual private network, Cisco Systems Inc. is beefing up its enterprise and service provider VPN wares through two separate acquisitions.

Cisco announced mid-January it would lay out US$567 million in total for all outstanding shares of Altiga Networks Inc. of Franklin, Mass., and Compatible Systems Corp. of Boulder, Colo. Altiga develops VPN clients, remote access gateways and management software for the enterprise edge, while Compatible makes service-provider-class IP Security (IPSec)-based VPN products.

The two acquisitions enhance Cisco’s existing VPN product lines, said Brent Rebus, Cisco Systems Canada Co.’s channel operations manager.

“We already have solutions that we’ve rolled out for the VPN space, like our Cisco 7100 router that a large customer or service provider would use, or our 1700 lower-end VPN routers. Then within our PIX firewall, there is some security there to be able to provide various solutions in the VPN space,” Rebus said.

“What we’re really doing with these acquisitions is…adding to and enhancing our capabilities for customers, whether they’re interested in taking a look at the enterprise solution or the VPN-based solution from a service provider perspective.”

The two-prong approach to the VPN market is necessary because end-user customers need choice when it comes to deployment, according to Rebus. “There’s no one way of rolling out a VPN strategy,” he said.

Altiga’s 76 employees will continue to be led by Altiga CEO Mark Freitas and will become part of Cisco’s enterprise line of business. Compatible and its 68 employees will report to Compatible CEO Matt McConnell and will be added to Cisco’s service provider business unit. The acquisitions will be accounted for as pooling of interests and are expected to close in the third quarter of Cisco’s fiscal 2000.

Jeff Wilson, an analyst at Infonetics Research Inc. in San Jose, Calif., said Altiga in particular was a good acquisition choice for Cisco. Altiga uses the same Information Resource Engineering Inc. (IRE) chipset that Cisco uses in its router and PIX platforms. In addition, both companies support IRE’s VPN software client.

“Altiga was a really simple decision on the enterprise side for [Cisco],” Wilson said.

As for Compatible, despite having higher-density VPN equipment than Altiga, its VPN sales have been mostly on the enterprise side as well, Wilson said. Cisco acquired Compatible just as it was starting to shift its focus toward the more lucrative service provider market, Wilson added.

“The way it looked to me is that [Cisco] wanted to position a combination of the Compatible box and a (Cisco) 6300 as a sort of makeshift CoSine or Spring Tide cloud-based VPN box,” Wilson said.

Companies such as CoSine Communications Inc. of Redwood City, Calif., Spring Tide Networks Inc. based in Boxborough, Mass., and Shasta Networks Inc. (whom Nortel Networks acquired in April 1999) are developing a new class of products for cloud-based VPN services, where the tunnelling all happens inside the service provider’s network, Wilson explained.

“People are building big, giant, expensive boxes, because from a service provider’s perspective, it’s a lot easier to deploy and manage something in your own network…Cisco is positioning its Compatible acquisition as competition against those products,” he said.

In a recent Infonetics research study that analysed the worldwide market for dedicated VPN hardware, Cisco did not even show up on the radar screen, Wilson said. He emphasized the study looked at only “purpose built” VPN hardware and did not take into account VPN-enabled equipment, such as all-purpose backbone routers, whose actual usage cannot be tracked. In addition, Cisco’s 7100 router has not been successfully implemented in any customer sites as of yet, he added.

“The 7100 didn’t ship, regardless of what Cisco tells you,” Wilson said. “That was the only actual dedicated VPN product it had announced prior to these acquisitions.”

According to Infonetics, the dedicated VPN hardware market totalled US$81 million worldwide in Q3 1999. The North American market accounted for US$47.6 million of the quarter’s VPN hardware revenues.

“It’s a small market,” Wilson said. “In terms of actual revenues, it’s such a small amount of money that anything could happen — particularly now that Cisco has acquired a couple of VPN companies, the market’s really going to open wide up.”