Why Cisco ended a war with its hated rival Arista

Cisco CEO Chuck RobbinsBusiness Insider

• Arista Networks has agreed to pay Cisco $400 million to get Cisco to settle its lawsuits, which will put the usually profitable networking upstart into the red.
• But Arista investors are thrilled with the news while Cisco investors are yawning.
• The two companies are famously bitter rivals.
• Insiders had previously told Business Insider they thought Cisco under CEO Chuck Robbins would have agreed to a settlement even sooner.

When Cisco CEO Chuck Robbins took over the job three years ago, insiders speculated to Business Insider that one thing he would likely do is settle the litigation between Cisco and its most hated rival, Arista Networks, a series of lawsuits that begun under his predecessor, John Chambers.

That settlement finally happened, the companies announced on Monday, and Arista investors are thrilled. Arista’s stock is up nearly 4% to around $267, even though Arista will have to restate its earnings and declare a rare loss for the quarter of $155.5 million.

Arista has made a name for itself in the tech world by being both relatively young and quite profitable. Although the $400 million stings, Arista can handle it. It ended its last fiscal year with over $1 billion in gross profit off of nearly $1.7 billion in revenue and $423 million in net profit after paying for things like R&D, sales and taxes.

For the payment, Cisco agreed to end all litigation and both companies agreed not to sue each other again on similar charges for five years over their current products, and three years on new products.

Arista was founded by some of the most well-known ex-Cisco engineers on the planet: Andy Bechtolsheim and David Cheriton. Both of them became billionaires as angel investors in Google, but their true claim to fame is all the networking technology they’ve invented over the decades. Arista’s CEO Jayshree Ullal was also once a member of  former Cisco CEO John Chamber’s inner circle.

As Arista grew and started peeling market share away from Cisco in the important data center market (where big internet companies are spending millions annually), it went from nipping at Cisco’s heels to a true pain in its side. So Chambers went on a full-on assault, suing Arista for patent infringement and copyright in every court and in every way.

Arista CEO Jayshree UllalAristaArista’s leaders publicly argued that Cisco had resorted to lawsuits because it couldn’t win in the market.

Cisco argued that Arista’s rise was on the back of technology invented at Cisco and had enough success in court to threaten Arista’s ability to import its products from offshore manufacturing facilities.

The truth, as always, was somewhere in the middle: Arista did deliberately design its products to be easy to use for its customers: the network engineers who had spent their careers learning the ways of Cisco. This helped it win Cisco’s customers away. And Cisco was irked at how well Arista was doing in an important market, sources close to both companies told Business Insider, 

Meanwhile, Cisco’s investors have yawned at the news that this litigation is over, with the stock price flat. They are more interested in the long-term changes Robbins makes as he pushes Cisco into the brave new world of software cloud subscription sales. And because of that, it was smart for him to finally agree to let the Arista litigation go, take a healthy $400 million settlement, and let everyone get on with the business of building next-generation networking technology.

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