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Cisco acquires ArrowPoint
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May 5, 2000: 5:25 p.m. ET
Networking gear supplier buys Internet infrastructure firm in $5.7B stock swap
By Staff Writers Martha Slud and David Kleinbard
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NEW YORK (CNNfn) - Networking equipment supplier Cisco Systems Inc. agreed Friday to buy ArrowPoint Communications Inc., a maker of Internet switches to speed transactions on the Web, for roughly $5.7 billion in stock.
The deal is the latest acquisition for fast-moving Cisco (CSCO: Research, Estimates), which has been on an extended shopping spree fueled by its soaring share price.
Terms of the deal call for San Jose, Calif.-based Cisco to issue 2.1218 shares of its stock for each share and option of ArrowPoint, a three-year-old company that has been public for less than two months.
Based on Thursday's closing stock prices, the pact values Acton, Mass.-based ArrowPoint (ARPT: Research, Estimates) at $135 per share. Amid speculation about a possible deal, ArrowPoint shares soared 27 percent Thursday to close at 134-13/16.
 In late Friday trading, ArrowPoint stock gained another 3-5/16 to 138-1/8.
Cisco stock added 2-15/16 to 66-9/16. At its current price, Cisco's stock sells for a very lofty 130 times its expected earnings for the fiscal year ending July 2000, enabling the networking giant to use its stock as currency for acquisitions. Last February, John Chambers, Cisco's president and chief executive, said he expected to make another 20-to-25 deals in the next 12 months.
Willing to pay billions for key technology
During the past 12 months, Cisco has shown that it is willing to pay billions of dollars for small, recently established companies with meager revenues if those firms have technologies that could be key in making future networks faster or more intelligent.
As an example, Cisco agreed last August to pay about $6.9 billion for Cerent, a Petaluma, Calif.-based maker of boxes that allow data and voice to switch quickly between copper lines and fiber-optic cables. Cerent had just $10 million in revenue in the six months ended June 30, 1999.
ArrowPoint is another expensive acquisition for Cisco. In early March, ArrowPoint's underwriters estimated that its stock would sell for $15 to $17 per share in its initial public offering. Later that month, ArrowPoint's shares were priced at $34 and ended their first trading day at $118.47.
"ArrowPoint is in an exploding market," said Cisco spokeswoman Jeanette Gibson. "We think we paid a reasonable price for adding this level of intelligence to networks. It's a really strategic market."
ArrowPoint lost $12.6 million in 1999 on sales of $12.4 million. The company is expected to grow to $38 million in revenue this year. The company is expected to begin turning a profit in this year's third quarter, according to the consensus forecasts of analysts polled by First Call.
Cisco said in a conference call Friday that the deal will have no impact on fiscal 2000 results, and will add "slightly" to earnings in Cisco's fiscal 2001 year. The transaction, which has been approved by both companies' boards of directors, is expected to close in Cisco's fiscal fourth quarter, which ends July 31.
Intelligently routing Web traffic
ArrowPoint produces switching equipment designed to quicken the delivery of content and e-commerce transactions over the Internet, a market that is expected to surge as Web purchasing grows. The company's switches can examine incoming data to route requests for Web content or transactions to the network server that is best able to handle the request.
The company's switches have enough "intelligence" to be able to route traffic based on what Web page a person is looking for or that person's identity. In that way, ArrowPoint's technology can reduce the number of servers Web sites have to employ and cut the amount of duplicate information that needs to be stored on separate servers.
"Electronic commerce requires server farms, and server farms are expensive," said Paul Strauss, a senior analyst at International Data Corp. in Framingham, Mass. "Cisco's idea is to put a front end to data traffic that can give priority to preferred customers and those asking for particular kinds of information."
ArrowPoint is led by CEO Chen Wu, who will join Cisco's Public Carrier IP Group. According to documents filed recently at the Securities and Exchange Commission, Wu owns 2.58 million shares of ArrowPoint stock now worth about $356 million. The company's president, Louis Volpe, now is worth about $180 million on paper.
ArrowPoint competitor Alteon Websystems (ATON: Research, Estimates) closed down 4-1/32 at 67, while competitor Foundry Networks (FDRY: Research, Estimates) closed up 7/16 at 90-1/8. 
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