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Cisco Finds A Soft Spot for ArrowPoint

Light Reading
News Analysis
Light Reading
5/8/2000

LAS VEGAS, NV -- Even by today’s standards, Cisco Systems Inc.’s acquisition of ArrowPoint Communications Inc. looks like a pricey deal.

Cisco http://www.cisco.com will exchange 2.1218 shares of Cisco common stock for each share of ArrowPoint http://www.arrowpoint.com. That’s almost $6 billion in stock – for a company that generated around $10 million in revenues last quarter (see Cisco To Acquire ArrowPoint For $5.7B).

In fact, the deal is really a testament to the increasing importance – and value – of software in building the next generation Internet infrastructure.

Cisco has told Light Reading that it bought ArrowPoint for its software – not its switch. “The driver was the software group. They have 80 engineers, and 62 of them are software engineers,” says Graeme Fraser, vice president and general manager of Cisco’s optical internetworking business unit.

Cisco plans to extricate the ArrowPoint code and port it across its switching product line, Fraser says. It will also integrate it into IOS, its routing code, “over time.”

That’s a potentially powerful move. Internet traffic is quadrupling every year. That makes content switching products like ArrowPoint’s a hot commodity, because they have the smarts to finesse Web traffic flows and thus improve performance. Including the capability across both its switch and router lines would give Cisco a powerful advantage over its competitors.

However, some voice doubts over whether Cisco’s strategy of adding content switching capabilities to IOS will pay off. Indeed, a group of delegates attending the NetEvents conference near Las Vegas exploded in laughter today when told about the plan.

“That is absolutely the wrong message for Cisco to give. What is IOS famous for? It’s that every time you add a feature to it, performance goes through the floor,” commented Michael Howard, principal analyst and founder of Infonetics Research http://www.infonetics.com

The Cisco/ArrowPoint deal has other content switch vendors smacking their lips in anticipation of similar payoffs. “This validates the market for us, and will force Nortel and Lucent to react,” says Selina Lo, vice president of marketing and product management at Alteon Web Systems http://www.alteon.com. Lo points out that Alteon generated revenues of $28 million in the last quarter – almost three times as much as ArrowPoint.

Fraser says Cisco considered buying Alteon, but didn’t because it’s product was “too hardware-oriented.”

--Stephen Saunders, US Editor, Light Reading http://www.lightreading.com

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