Blue Coat swoops in to acquire Packeteer for $268M

Blue Coat emerges as Packeteer's "white knight" and looks to gain share in WAN optimization by integrating Packeteer's QoS into its ProxySG product.

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Blue Coat Systems Inc. emerged as the winner in the Packeteer Inc. chase, revealing Monday its intent to acquire its WAN optimization rival for $268 million.

Packeteer had been in play since it received an offer from hedge fund firm Elliott Associates LP in early March to buy the company for $200 million. Elliott, which owns a 9.9% stake in Packeteer, said it was unhappy with Packeteer's management team. Packeteer management spurned Elliott's offer and earlier this month revealed it was negotiating with other suitors.

Blue Coat's winning bid is worth $7.10 per outstanding share, and it is expected to close the deal by midyear. Packeteer's stock price opened at $6.97 today.

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In a conference call to discuss the deal this morning, Blue Coat CEO Brian NeSmith said Packeteer had 10,000 customers at the time of the acquisition. Packeteer also has more than 50 sales business units, as well as a strong sales channel that NeSmith said Blue Coat is eager to get its hands on.

Although they both sell WAN optimization devices, Blue Coat and Packeteer are based on different core technologies. Blue Coat started with a security appliance, then added local file caching capabilities and bought NetApp's NetCache business in September 2006. It began offering WAN optimization in its appliances in March 2006.

According to Rob Whiteley, an analyst with Forrester Research, Packeteer "coined, if not created, the WAN optimization market." Because of its PacketShaper product's ability to automatically classify and manage up to 400 different applications on the network according to policy, "they have by far the best Quality of Service [QoS] and traffic shaper on the market, and they are the de facto appliance to get visibility into the WAN." Packeteer added WAFS when it acquired Tacit Networks in May 2006.

NeSmith called application classification "one of the jewels of Packeteer."

But Packeteer's products as they exist today probably won't last much longer. NeSmith, said Blue Coat will move "very aggressively" to port Packeteer's PacketShaper software onto the ProxySG platform.

Whiteley said this could be an improvement for some Packeteer customers. "Packeteer never did that great a job integrating Tacit," he said. "One customer described it to me as two different boxes connected via Ethernet under one piece of sheet metal."

Still, there are hurdles to integration. For starters, Packeteer and Blue Coat software use different proprietary Linux operating systems, and Packeteer's WAFS is based on Windows. This concern was raised by analysts on the conference call, but NeSmith said the two products are similar enough that Packeteer's software should be portable onto the ProxySG appliance.

"Blue Coat has already been through this type of integration when it bought NetCache," Whiteley pointed out. "They were able to help customers through that."

The challenge for both Blue Coat and Packeteer prior to the merger had been making sure WAN optimization ties into a broader network service, according to Whiteley. Cisco and Juniper have tie-in with routers they already sell. Riverbed Technologies has opened up its Steelhead appliances to let third-party services run through them, and Citrix and F5 Networks own other assets in the data center. "Blue Coat has always had a security spin, but they need to expand on that vision," he said.

A September 2007 Forrester Research Wave report on the WAN optimization market also warns that some users might not be keen on Blue Coat's proxy architecture. "On the upside, a proxy means ultimate control over your WAN traffic, providing the best visibility, management and optimization of all apps," the report reads. "On the downside, a proxy requires that, for best results, you insert a trusted middleman between your users and servers and that you size the device properly because it terminates all traffic, and you don't want a bottleneck."

Packeteer had an OEM deal with Brocade Communications going back to Tacit's days as an independent company, but Brocade officials revealed this week that the deal was terminated in November 2007. Tacit also worked closely with Microsoft on development, because it had the only WAFS products based on Windows code. NeSmith said he's not sure where Blue Coat stands with Packeteer's remaining relationships yet. "We will be approaching [partner] companies in the coming quarters," he said, adding that partnerships "had no effect on the motivation" to acquire Packeteer.

Whiteley said he expects Packeteer's remaining relationships to stay stable. "I don't think much will [change] there -- it will all get folded in."

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