On a very slow market day, Cisco's purchase of ARPT for $6b makes interesting reading:
Friday May 5, 2:18 pm Eastern Time
UPDATE 3-Cisco to buy ArrowPoint for $6
billion
(Adds analyst, executive comments, PVS San Jose)
By Duncan Martell
PALO ALTO, Calif., May 5 (Reuters) - Cisco Systems Inc., the largest maker of computer networking
equipment, on Friday said it would buy ArrowPoint Communications Inc. (NasdaqNM:ARPT - news) for about
$6 billion in stock, in a move to add sophisticated software for routing Web-page traffic to its portfolio.
The acquisition deal -- Cisco's (NasdaqNM:CSCO - news) second-largest ever -- marks its 10th since Jan. 1,
and the San Jose, Calif., company has no plans of slowing the pace. It has announced its intention of
swallowing another 10 to 15 targets before the year is through, up from 18 in 1999. Only last year's $6.9
billion deal to acquire Cerent Corp., which develops optical networking technology, carried a higher value than
the ArrowPoint transaction.
With ArrowPoint, Cisco is acquiring a product line that is clearly in demand. As traffic on the World Wide Web
explodes and electronic commerce at companies such as Amazon.com Inc. surges, the need for smooth
delivery of Web pages to users grows as well. ArrowPoint's three products, known as content switches, do
just that -- efficiently bringing Web data to users by means of advanced software.
``The idea is to take all this traffic and be able to balance this data load across multiple (computer) servers
to smooth out peaks in demand,'' said analyst Michael Cristinziano at Gerard Klauer Mattison.
``I imagine this deal will result in an order of magnitude of effectiveness in terms of sales of ArrowPoint's
product'' because Cisco's effective sales force will market the devices, he said.
$2 BILLION MARKET BY 2003
Cisco officials said the market for content switching looked even stronger than industry forecasts, which see
sales growing to $2 billion in 2003, from $500 million now.
Shares in both companies gained after news of the deal. Cisco shares rose 3-7/16 to 67-1/16, bringing the
acquisition to a value of $6 billion, up from the $5.7 billion, based on Thursday's closing share price.
ArrowPoint shares rose 3-7/16 to 138-1/4 on Nasdaq, adding to a 20 percent gain on Thursday.
About two-thirds of ArrowPoint's revenues come from Internet service providers (ISPs), application service
providers (ASPs), which provide Web based software, and Web site management, or hosting companies.
In the quarter ended March 31, ArrowPoint generated sales of $9.55 million and a loss of $4.7 million. Some
analysts see ArrowPoint's revenue jumping this year to about $60 million.
``It's an extremely fast-growing market,'' ArrowPoint President Lou Volpe said in an interview. ``We really
started out with anyone doing business over the Web, and are typically focused on the ISP, ASP and Web
hosting marketplaces.''
EXCITING OPPORTUNITY
Ammar Hanafi, Cisco's head of business development, said he was comfortable with analysts' estimates of
future revenues for ArrowPoint. ``We are comfortable with where the Street is at on ArrowPoint revenue
projections on a stand-alone basis,'' he said on the call, adding in an interview, ``It's a really exciting
business opportunity for Cisco.''
Terms of the deal call for Cisco to issue 2.1218 of its shares for each ArrowPoint share and option. That
values ArrowPoint at about $135 per share, based on Cisco's stock price Thursday.
The acquisition will neither add to nor subtract from earnings in fiscal 2000. It will add slightly to profit in
calendar 2001, said Cisco Chief Financial Officer Larry Carter on a conference call with analysts.
ArrowPoint, founded in 1997, made its debut as a public company on March 31, and shares more than tripled
to close at 118-31/32 on its first day of trading.
ArrowPoint's 337 employees, including Chief Executive Officer Cheng Wu, will become employees of Cisco. The
business will join Cisco's service provider equipment unit when the transaction closes, expected by Cisco's
fourth quarter ending in July. |
