Juniper Networks Inc. said it agreed to acquire NetScreen Technologies Inc. for roughly $3.63 billion in stock, strengthening the security of its Internet-switching gear and hinting at a broader challenge to industry kingpin Cisco Systems Inc.

Juniper, Sunnyvale, Calif., is the second-largest maker of routers that direct computer traffic across the Internet. Until now, Juniper has sold its gear almost exclusively to telecommunications companies. NetScreen, whose headquarters are practically across the street in Sunnyvale, makes security devices such as firewalls that keep intruders out of networks and has sold primarily to corporations.

NetScreen will significantly expand Juniper’s offerings. Equally important, it will give Juniper a beachhead to challenge Cisco in selling networking gear to companies. The deal is a sign that “Juniper over time will build itself to be a direct competitor to Cisco in all their product lines,” said Sam Wilson, an analyst for JMP Securities. “I suspect it’s not the last acquisition we’ll see.”

Analysts generally liked the strategic rationale for the deal, although investors questioned the hefty 56% premium Juniper had agreed to pay. At 4 p.m. Monday on the Nasdaq Stock Market, Juniper shares were down 11%, or $3.29, to $26.18, slicing more than $456 million from the value of the deal.

Juniper said it would exchange 1.404 shares of its stock for each share of NetScreen. When announced before regular trading hours Monday, the deal valued NetScreen at $41.37, 57% above NetScreen’s 4 p.m. Friday price of $26.40. NetScreen shares at 4 p.m. Monday were up 36%, or $9.54, to $35.94.

“It was echoes of 1999 when I heard the price,” said Joe McGarvey, a senior analyst for research and consulting firm Current Analysis Inc., Sterling, Va.

Juniper Chief Executive Scott Kriens said the deal represented “strength matched with strength” and described NetScreen as a “natural complement” to Juniper’s gear. He said Juniper would begin selling its products to companies through NetScreen’s army of resellers and would integrate NetScreen’s technology into its products.

Executives of both companies said they expected minimal layoffs of NetScreen’s 900 employees after the deal is completed, expected by June. “We’re not looking to reduce costs. We’re looking to accelerate the business opportunities,” said David Flynn, NetScreen’s vice president of marketing.

Juniper was an early investor in NetScreen, which was founded in 1997. Mr. Kriens said Juniper had sold its shares following NetScreen’s December 2001 initial public offering.

Mr. Wilson of JMP Securities said Juniper likely was attracted by NetScreen’s technology, which relies on custom-designed semiconductors. That is similar to the approach Juniper took in building fast routers for big telecom networks.

Muayyad Al-Chalabi, a managing director for research and consulting firm RHK Inc., South San Francisco, Calif., said both Juniper and NetScreen have been targeting government customers.The U.S. government accounted for nearly 10% of NetScreen’s revenue in the three months ended Dec. 31, and Juniper recently won a contract to supply routers for a U.S. Defense Department computer network. “It’s hard to bid on government stuff without a security play,” Mr. Chalabi said.

Article written by Scott Thurms, WSJ