Cisco, the communications equipment giant and
the world's biggest company in terms of market
value ($470 billion), announced last Friday that it
bought Arrowpoint. As usual with Cisco, the
acquisition was made through a share swap, at
$5.7 billion on the day of the deal. Since the
deal was done, Cisco's share rose 6.5% to
$67.7 per share. NASDAQ-traded Arrowpoint's
share rose to $140, which brings the company's
market value to $4.91 billion.
Arrowpoint was set up in 1997, and issued on
NASDAQ (ARPT) in early April this year. It has
337 staff, and deals in several sectors, including
switching. Cisco says it bought Arrowpoint in
order to acquire its load balancing technology.
The acquisition indicates the great importance
Cisco attaches to this field.
What is load balancing? It involves software and
hardware products for efficient management of
content transmission on Internet sites. And why
is it such a hot market? Because the most
conspicuous trends in the Internet sector are
sites enabling B2B (business- to-business) or
B2C (business-to-customer) commerce. Such
sites must be managed in the most efficient
manner, so as to offer the highest-quality
service, because a dissatisfied customer will
simply never go back to the site.
Such solutions are manufactured by a number of
small companies - Israeli company RADware,
and US companies F5, Alteon and Arrowpoint -
which differ from each other in terms of the
solutions they offer: software or hardware.
According to RADware's CFO Meir Moshe, the
biggest player on the market is none other than
Cisco. According to Moshe, Cisco already has
40% of the market. Moshe adds that "the two
companies' technology is totally different, and
their market positions also differs accordingly.
Arrowpoint bases its solutions on a switch it has
developed, but it's a technology that hasn't
proved successful. We, in RADware, have a
comprehensive solution based on hardware and,
principally, on software, which is why our profit
margin is 84%".
According to Moshe, "We won first place in
terms of technology in five out of seven objective
tests conducted by professional magazines. We
made it to second place in the other two, but
neither Cisco nor Arrowpointwon first place.
Technologically, we're way ahead of the other
competitors. What is more, a switch-based
solution is superfluous for 95% of companies,
which already have independent switching."
As far as RADware is concerned, impact of the
acquisition will be limited, will be confined to two
areas. First, Cisco's acquisition of Arrowpoint
removes another competitor from the market.
Second, Arrowpoint's acquisition at a company
value of $6 billion, as of today, "indirectly
indicates RADware's price tag". RADware is
currently traded at a market value of $425.5
million - 12 times less than Arrowpoint's market
value, despite similar Q1 financial results, with a
slight advantage for RADware: Arrowpoint's
sales were $9.5 million, but it lost $4.7 million,
whereas RADware's sales were $6.5 million, and
it made a profit of $0.86 million.
NC general manager Yair Lapidot outlines the
impact of Cisco's acquisition on RADware: "On
the one hand, it represents clear recognition of
the importance of efficient management of
Internet sites. On the other hand, it means that
competition will be much tougher". Cisco is
known as an aggressive rival, and direct
competition with the neighborhood bruiser is
never a pleasant prospect. However, Lapidot
strikes a reassuring note, recalling that "only
two or two-and-a-half years ago, people were
saying that Cisco was a big competitor of Check
Point's in Firewall software. We've seen how far
Check Point has come despite this competition.
Cisco is a strong player that cannot be ignored,
but it's a giant company that is involved in many
sectors, and this specific field isn't the main
one. For them, it's only yet another investment
in a new area." Cisco's acquisition of Arrowpoint
may blaze the trail for other giant companies,
prompting them to buy or merge with one of the
companies in this field.