The company's purchase of ArrowPoint Communications today is indicative of a growing need among service providers and Web site hosting firms for networking equipment that helps Web sites run faster and more reliably.
With today's $5.7 billion deal, the ever-acquisitive Cisco has placed itself at the center of a hot, emerging market for "Web switches," equipment used by e-commerce Web sites and Internet service providers to manage Net data traffic.
Start-ups such as ArrowPoint, Alteon WebSystems, Foundry Networks and F5 Networks were the original trailblazers in creating devices that, in layman's terms, act like traffic cops in busy intersections. Web switches ease traffic congestion by distributing information evenly among servers on a network, so no one server gets overworked.
But Cisco gets more than that. The company said it plans to spread ArrowPoint's technology across its wide range of switching devices, giving it the ability to scan all the data flowing through, which allows Web sites and service providers to give better quality of service to their customers.
For example, a Web site can ensure that online transactions such as purchase orders get higher priority for bandwidth than other uses, such as employees' Web surfing.
Analyst Peter Firstbrook of the Meta Group said Cisco needed both the Web switch technology and ArrowPoint's ability to scan the software applications, or queries, that go through the network.
"ArrowPoint is arguably the best Web switch out there now, but the key here is they didn't just buy a product for $5.7 billion," Firstbrook said. "The payback is forever because they can put this (technology) into their other switches. You can give priority and quality of service to people. A service provider can offer gold, silver and bronze service and charge more for it."
Larger networking firms have been trying to plant their stakes in the market, which is expected to grow from $260 million in 1999 to $828 million by 2002, according to a study by Internet Research Group.
Lucent Technologies recently jumped into the market by investing in Web switch company Holontech, now called CyberIQ. But analysts say Cisco's acquisition puts pressure on its other rivals, especially Nortel Networks, which doesn't have comparable technology.
Other networking companies are lagging, Firstbrook said. Nortel has licensed Intel's iPivot technology, and 3Com and Extreme Networks have licensed technology from F5. Both Intel and F5 have built appliances that attach to existing network switches.
The networking equipment giant has acquired 10 companies this year.
|ArrowPoint Communications||May 5, 2000|
|Seagull Semiconductor||April 12, 2000|
|PentaCom||April 11, 2000|
|SightPath||March 29, 2000|
|InfoGear Technology||March 16, 2000|
|JetCell||March 16, 2000|
|Atlantech Technologies||March 1, 2000|
|Growth Networks||Feb. 16, 2000|
|Altiga Networks||Jan. 19, 2000|
|Compatible Systems||Jan. 19, 2000|
With Cisco entering the Web switch market, Argus Research analyst David Toung said the smaller Web switch companies will have a tougher time trying to compete.
"It used to be a bunch of little guys with little revenue, so this gives ArrowPoint a leg up," he said. "They get instant credibility being attached to the Cisco name. Presumably, the other companies will start looking for partners."
Analysts believe Cisco's purchase will make ArrowPoint rival Alteon an attractive acquisition target because their products are comparable. Both companies launched public offerings recently, with ArrowPoint's shares reaching the high $130s, while Alteon reached $138 before falling to the current price of around $70.
"Nortel is the next company to buy something," Firstbrook said. "They may realize they're late to the market and go out and pay way too much, which is what Cisco did."
Before the acquisition, ArrowPoint's stock rose 27 percent after an analyst said revenue would quintuple this year and more than double in 2001.
J.P. Morgan Securities analyst Greg Geiling yesterday predicted that ArrowPoint's revenue would rise from $12.4 million in 1999 to $62.7 million this year. He also said that sales would reach $150.6 million next year.
"The market opportunity is, frankly, exploding," said Ammar Hanafi, vice president of business development for Cisco.