Updated from 10 a.m. EST

Router maker

Juniper

(JNPR) - Get Report

cashed in some of its 2004 rally chips Monday, jumping into Net security with a $3.3 billion purchase of

Netscreen

(NSCN)

.

The proposed deal, due to close in the second quarter, calls for Juniper to swap 1.4 of its shares for each share of its Sunnyvale, Calif., neighbor. Based on Friday's closing price, Juniper is paying a premium of some 58% to acquire the Internet bug repeller.

"The reason we are so excited," Juniper CEO Scott Kriens said on a Monday conference call, is that "every market in the world has security issues."

Investors weren't as excited, though, sending Juniper shares down 14% in midday action Monday. The slump trimmed the value of the deal by around $500 million in less than two hours, as Wall Street wondered whether Juniper's pricey foray into a brand new market would result in a

hiccup in the company's impressive growth. Worse yet, some now foresee a collision with networking giant

Cisco

(CSCO) - Get Report

.

"They are a dominant router supplier to the telecom market," American Technology Research analyst Albert Lin says of Juniper. "But if they want to continue to grow at a tremendous rate, they'll probably feel they have to offer more features and products." Lin has no ratings on Juniper or Netscreen.

Monday's events come in the wake of last month's across-the-board gain in the value of networking stocks. Heading into Monday's trading, Juniper was up more than 50% on the year as investors wagered that telecom-equipment players like it and

Nortel

(NT)

were

poised to cash in on a long-awaited revival of network-equipment spending. Meanwhile, shares in Netscreen had been relatively left out, having appreciated just over 7% through Friday.

That all changed Monday morning, as Netscreen zoomed and Juniper slumped as Wall Street worried about the rich premium the company is preparing to pay. Netscreen shares jumped $8.45, or 32%, to $34.85 in early trading Monday, their highest level in two years since coming public. Meanwhile, Juniper shares fell $4 to $25.47.

"Customers tell us they need more secure networks," Kriens said on the conference call.

That's where Netscreen comes in. Founded in 1998 as a supplier of firewalls and virtual private networks, or VPNs, Netscreen quickly gained popularity with computer network operators looking for ways to defend sensitive operations. Netscreen continued to add security features, including intrusion detection and denial of service protection.

Kriens says the deal will be accretive to Juniper on a non-GAAP basis after the deal closes. Last month, Juniper helped to set off the massive networking rally by

posting a blowout quarter and boosting guidance.

Juniper's primary customers are phone companies, and analysts estimate that 75% of Netscreen's customers are businesses that operate their own internal computer networks. The executives were asked how they would bridge the two segments of the market, and Netscreen's CEO Bob Thomas said he saw "opportunities in both directions."

The two companies' offices are about a half-mile apart, which will help with the integration process, says Kriens. Netscreen will become Juniper's Internet security products unit, led by Thomas, who will report to Kriens.

Dropping
Juniper's selloff

By vastly expanding Juniper's reach, the move could bring Juniper into closer rivalry with Cisco. Wall Street, taking note of Juniper's latest move, bid up shares of security companies seen as a natural fit with the networking juggernaut.

Check Point Software

(CHKP) - Get Report

, a security outfit often paired with Cisco in the loose speculation of the industry, was up $1 at $23.25. Cisco, fresh off last week's

earnings-forecast setback, was up a quarter to $24.99.

"People believe they have an edge in tech, which gives them more rapid growth and allows them to take market share," American Technology's Lin says of Juniper. "Those are the kinds of things investors expect, and I think Juniper knows that. They have to continue to grow if they want to enjoy the premiums they've gotten."