Demand for Speed Drives Web Accelerator Buying Spree

By John Pallatto  |  Posted 2005-06-03

Demand for Speed Drives Web Accelerator Buying Spree

The unceasing demand for a fast and responsive Internet has helped to make those companies that are selling Web application acceleration technology the hottest buyout targets in Silicon Valley, according to industry analysts.

Juniper Networks Inc., Cisco Systems Inc. and Citrix Systems Inc. have snapped up four companies specializing in application acceleration in less than six weeks, leaving a paltry handful of surviving independent companies in the field.

Analysts say the buying has been caused by a combination of factors specific to the network technology industry, as well as to general business conditions that currently favor corporate buyouts as opposed to initial public stock offerings for high-tech startups.

Web application accelerators are software packages that are usually loaded into hardware appliances to boost the speed and responsiveness of Web sites and Web programs. They use caching technology, data compression or TCP traffic optimization—or a combination of the three—to boost network responsiveness.

Most of the companies in the field were privately held startups that had been founded in the late 1990s. In general, they have grown steadily, if not spectacularly. F5 Networks Inc., founded in 1996, is currently the largest surviving company in the field.

Juniper Networks started the current feeding frenzy in late April when it bought out Peribit Networks Inc. and Redline Networks Inc. for a total of $469 million.

Cisco Systems followed late last month when it acquired FineGround Networks Inc., of Campbell, Calif., a producer of performance optimization appliances, for $70 million.

The most recent deal, on Thursday, involved Citrix Systemsacquisition of NetScaler Inc., of San Jose, Calif., for $303 million in stock and cash.

The development of on-demand hosted applications and SOA (service-oriented architecture) has demonstrated the need for a high-performance Internet that is faster and more responsive, noted Scott Crawford, an analyst with Enterprise Management Associates, a technology industry research firm based in Denver.

Click here to read Juniper Networks Chairman Scott Kriens explanation of why Peribit Networks and Redline Networks were important acquisitions for his companys product line.

"More enterprise applications are going to be made available as SOAs over the next few years," Crawford said. Citrix, Cisco and Juniper Networks know "it is absolutely important to have a foothold in that space," he said.

The companies are acquiring the technology they need so that customers will have access to a highly scalable network that will support the volume of data and transactions these applications will generate, Crawford said.

Once Juniper bought two companies at once, a herd mentality" took over, triggering the decisions by the other two companies to make their acquisitions in quick succession, said Peter Christy, an analyst with NetsEdge Research Group, in Los Altos, Calif.

Juniper pursued Peribit and Redline because it allowed the company to add new technology to its product line that is of particular interest to enterprise customers, Christy said.

The acquisitions help make Juniper more competitive in relation to Cisco in a new technology area where it doesnt have to "battle head-to-head with Cisco on switches and routers," which are rapidly becoming commodity technology, he said.

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For Cisco, the FineGround Networks acquisition is important because it needs to move into new growth markets that will supplement its core switch and router product lines, he said.

To stay on a growth path, "Cisco needs to provide a higher level of functionality in the network," Christy said. Network security and voice over IP have turned into high growth markets for Cisco, he said. Now the company wants to turn Web performance optimization into another new growth market, he said.

The Citrix acquisition of NetScaler "makes sense" because it allows it to move deeper into the application-access and performance technology sector, "where they already have a tremendous amount of market strength with older technology," he said.

Click here to read how Cisco and Juniper Networks are continuing to make strategic acquisitions to augment their core router product lines.

Citrix will be able to leverage its strong channel partnerships to grow sales of the NetScaler technology much faster than what NetScaler could have done on its own, according to Christy.

However, Christy also suggested that more fundamental market changes are why independent startup technology companies are more willing to be bought out rather than to seek a big payoff from an initial public stock offering, which was typical just six years ago.

Once they go public, technology startups are facing greater scrutiny and greater expense as they seek to comply with the Sarbanes-Oxley Acts financial accountability regulations.

"The overhead of being a public company has changed pretty dramatically," he said. "Its no longer quite as attractive as it had been," and this makes being acquired by a larger company a more attractive proposition, Christy said.

This wave of acquisitions means there arent that many surviving companies left in the Web application acceleration market, said Robert Whitely, an analyst with Forrester Research Inc., of Cambridge, Mass. Besides F5 Networks, the most noteworthy survivors are Radware Ltd., of Mahwah, N.J., and Coyote Point Systems, of San Jose, Calif.

F5 Networks and Radware, as public companies, are big enough and likely have sufficient revenue and products to sustain themselves as independent concerns, Whitely said. But the recent acquisitions have drawn a lot of attention and may generate additional investment in this sector, he said.

Bill Kish, the founder and CEO of Coyote Point Systems, said that the recent acquisition spree hasnt shaken his companys determination to remain an independent company.

"We are not venture-backed. We have been profitable for seven out of our eight years in business," Kish said. Its not Coyote Points goal to drive steadily toward an initial public offering or a buyout. It plans to continue to "build the company as a product-oriented organization, because that is the path we are taking and that we feel we will be most successful with," Kish said.

However, Kish said he still believes that the recent series of buyouts means that the sector has matured to the point where it wont support a new generation of startups.

"I think that there are still opportunities to do interesting things that nobody has thought of, and I hope that new companies will continue to pop up" to bring their ideas to the market, he said.

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