It is believed to be the highest price ever paid for a privatelyowned technology company. Cerent had sales of only pounds 6m over the last two years, although demand for its devices, which route telephone calls and Internet traffic on and off fibre-optic lines, will see that figure hit pounds 200m next year, with growth set to continue.
"This is unbelievable, and unprecedented," said Greg Rossmann, a managing director of the technology investment banking firm Broadview International. "It is truly reflective of the expectations for how the Internet infrastructure is going to be forced to evolve to support the demands of e-commerce."
Cerent is widely perceived to have a head start in an expanding sector. Its equipment acts as a link between long-distance communications lines and local telephone and data networks, helping to reduce congestion and allow phone companies to move more types of data faster.
Cisco began by making the routing devices that direct traffic on the Internet. Since then it has built a broad-based networking business via 40 acquisitions using its highly valued stock as a powerful takeover currency. Its market capitalisation of nearly pounds 140bn makes it the third biggest US company after Microsoft and General Electric.
Investors, who have put about pounds 50m into Cerent, will gain huge windfalls. For example, Kleiner Perkins Caufield & Byers, a Silicon Valley venture capital firm, invested pounds 5m for a near-31 per cent stake that is now worth pounds 1.3bn in Cisco shares.
Another prominent investor is Michael Dell, the PC retailing billionaire, who bought pounds 18m of Cerent convertible notes last month. However, the terms under which the notes can be converted into shares have not been disclosed.
Mr Dell's interest in the firm reflects his long-term focus on Internet e-commerce and telecoms network infrastructure companies. His own company, Dell Computer, pioneered the emerging e-commerce market by letting customers configure and order PCs via the web.
Indeed, shares of infrastructure companies such as Cisco, Nortel and Lucent have gained, even as actual Internet stocks have been hammered in recent weeks. The resilience is the result of data traffic volumes tripling every three months due to the explosion of computer traffic generated by the Internet.
This has led to a conviction among investors that telecoms carriers will be spending hundreds of billions of pounds in the next decade to rewire the globe.