ArrowPoint technology hits Cisco jackpot

ArrowPoint, a start-up that builds equipment that speeds delivery of Web content over the Internet, held a public offering March 31 that gave the company a market value of about $1 billion based on its opening stock price.

Then last Friday, networking giant Cisco Systems acquired the start-up for about $5.7 billion in stock, based on Cisco's stock price at the time of the deal. That essentially increased ArrowPoint's value sixfold in just six weeks. Cisco shares have since dropped.

"We would have been comfortable staying independent," ArrowPoint president Louis Volpe said at the Networld+Interop conference. "But with what they were offering, it became a no brainer."

Cisco was in desperate need of ArrowPoint's Web switches, equipment used by e-commerce Web sites and Internet service providers to manage Net traffic. The market is expected to grow from $260 million in 1999 to $828 million by 2002, according to a study by Internet Research Group.

As is the story with many new markets, start-ups--such as ArrowPoint, Alteon Websystems and F5 Network in this case--pave the way. Once it's developed, established firms find the opportunities in that market too lucrative to ignore. They either develop the new technology in-house, partner with existing companies or acquire the start-ups in the market.

Extreme Networks, 3Com and Cabletron Systems have so far chosen to partner with F5. Cisco, which had its own antiquated but popular Local Director device, chose to beef up its Web traffic management capabilities by acquiring ArrowPoint.

Cisco was courting ArrowPoint a week before the public offering, but company executives wanted to see the offering go through, Volpe said. So after the three-year-old start-up became public, Cisco came calling.

"This market space is growing fast and will become a major market. And we felt if there is going to be consolidation, you want to be the first acquired, and you want to be able to select your partner," Volpe said. "This ensures our technology will become dominant."

ArrowPoint's rivals Alteon and F5 Networks--now potential acquisition candidates--say they are undeterred by Cisco's latest move, but they admit they face a tougher foe in Cisco.

"It's good news because it validates the market. But it's a challenge now, we can't deny it," said Alteon spokesman David Callisch.

Steve Goldman, an F5 senior vice president, said smaller firms can compete against Cisco. He cited the security software market as an example. Cisco acquired companies to enter the firewall security software market, but Check Point Technologies has been able to hold its own and compete, he said.

Companies such as Nortel Networks, Ericsson, Siemens and Alcatel are potential suitors for the remaining Web switching firms. While executives from the independent Web switch companies say they're not interested in shopping themselves, they admit the ArrowPoint acquisition raises their value.

"It's like when a neighbor sells a home with a big price, it drives up the value of your home," said F5's Goldman.

Since going public, ArrowPoint's shares have been on a roller-coaster ride, reaching $140 on its first day of trading before plummeting to $59.50 just two weeks later. The company's shares have been rebounding the last few weeks, jumping back toward its original level.

The day before being acquired, ArrowPoint's stock jumped 27 percent after an analyst said revenue would quintuple this year and more than double in 2001.

Alarmed by the share price increase, the Securities Exchange Commission is currently investigating possible insider trading.

Volpe said ArrowPoint believed it could succeed in the market as an independent company but said the chance to sell to Cisco was too good to pass up.

"Combining with Cisco was the right move now for the company," he said. "The risks associated with being a smaller company with new technology basically goes away. We will become the No. 1 market share leader."