By Sinead Carew
NEW YORK (Reuters) - Network equipment maker Cisco Systems Inc, looking to protect its core business from new competition, has bought out the remainder of its majority-owned data center technology start-up, Insieme, in a deal that could cost up to $863 million.
Cisco, which already owned 85 percent of Insieme, said it closed the deal with its employees, and the final price would be tied to sales targets for which it did not reveal details.
It also unveiled Insieme's first products, which are Cisco's answer to software defined networking (SDN) technology, a growing trend among its rivals in developing software with features that are typically found in high-end network hardware.
Because SDN technology can run on cheaper hardware than Cisco's expensive routers and switches, the network hardware leader had to find a way to protect its equipment sales.
Chief Executive John Chambers, who discussed the products at a New York event, said Cisco's approach could save customers money and create a multibillion-dollar dollar business.
He told customers and technology partners that Insieme products would, "reset the stage for IT for the next decade."
Rivals who have been gaining attention because of SDN include privately held Arista Networks, as well as VMware Inc, which created waves when it bought SDN start-up Nicira in 2012 for just over $1 billion. Juniper Networks Inc and Hewlett-Packard Co are also Cisco competitors in the sector.
Insieme was launched in early 2012 with a $100 million investment from Cisco, followed by a $35 million round of funding in November 2012.
The start-up, which has 286 employees, was founded and is run by longtime Cisco engineers Prem Jain, Mario Mazzola and Luca Cafiero, and is now the third start-up they have created that has been folded back into Cisco.
The products include the Nexus 9000 family of network switches, which is ready to be shipped to customers, and a software controller called the Cisco Application Policy Infrastructure Controller (APIC), which will be available for sale in the first half of 2014.
The controller was designed to centralize data center management for everything from network, storage and computing equipment to applications and security, and make rolling out new software or making changes to existing applications much easier.
JP Morgan analyst Rod Hall said that, while Cisco's technology looks "solid," aggressive pricing could, "make it tough for the company to grow earnings in coming years."
RBC analyst Mark Sue said Cisco is trying to "turn the world around by making its system more flexible," which could be good news for its customers, but bad news for the industry overall.
But HP, which sells server computers that run SDN technology, responded to the news by criticizing Cisco's strategy. Dave Larson, HP's networking chief technology officer, said Cisco's offering, "locks customers into a proprietary Cisco network."
Cisco says that, by combining central management with its own hardware, customers could see total cost-of-ownership savings of 75 percent, compared with software-only management systems.
Cisco also announced partnerships with key data center technology providers, including Microsoft Corp, IBM Corp and EMC Corp.
(Reporting by Sinead Carew and Nicola Leske; Editing by Jeffrey Benkoe and Andre Grenon)