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Blue Coat digs deep to acquire Packeteer

But staff braced for pink slips.

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Security and wide-area network acceleration provider Blue Coat Systems has made a deal to buy Packeteer, a long-time WAN optimisation vendor, for about $268 million.

Blue Coat will integrate Packeteer features, including the company's traffic prioritisation technology, into its own Blue Coat ProxySG line of appliances, according to a company press release. The deal will also help Blue Coat reach more customers through Packeteer's well-established global sales and distribution channel. The company expects significant cost savings almost immediately.

Packeteer, founded in 1996, was an early developer of appliances that could identify different types of packets in the traffic going over a WAN and let administrators shape traffic to make critical applications perform better. This and other WAN optimisation techniques are widely used to speed up data transfers and application performance over long distances, helping enterprises centralise IT resources and maintain global operations. Worldwide, Packeteer has more than 10,000 customers and an installed base of more than 50,000 products, according to Blue Coat.

Blue Coat, also founded in 1996, makes a variety of appliances for securing and speeding up applications over WANs, and has said it has more than 8,000 customers.

Both companies are publicly held and based in Silicon Valley, with Blue Coat in Sunnyvale, California, and Packeteer in nearby Cupertino. Blue Coat will buy Packeteer with a combination of cash and an $80 million private placement of convertible notes. The deal will consist of a tender offer for all of Packeteer's shares, followed by a merger of Packeteer with a subsidiary of Blue Coat. The deal is expected to close this quarter.

Blue Coat expects a reduction in headcount following the buyout. It has about 950 employees and Packeteer has between 400 and 450, said Brian NeSmith, president and CEO of Blue Coat. Packeteer president, CEO and director Dave Cote doesn't wish to stay on at the merged company, NeSmith said.

Blue Coat is primarily focused on controlling how enterprise employees use the Internet and protecting them from hazards there, according to NeSmith. Packeteer will bring stronger WAN traffic management, application classification and quality of service technology than Blue Coat has now, he said. But Blue Coat's products for branch offices outshine those Packeteer acquired with Tacit Networks and will take precedence, he said.

"It's the combination of security and acceleration that, in my mind, is our greatest strength," NeSmith said. Security measures traditionally have been network speed bumps because of the processing required to inspect and deal with traffic. "Not only do we not slow it down, but ... whatever's authorised, we speed it up," NeSmith said.

WAN and Web optimisation are a good fit because many enterprises are looking for both, said analyst Michael Brandenburg of Current Analysis. But a long-term challenge for vendors such as Blue Coat is even greater consolidation of functions into network elements such as routers, he said.

"Cisco and Juniper have the dominant places at the edge, so their moves into the acceleration space are definitely a threat to standalone appliance vendors," Brandenburg said.

Blue Coat's bid of $7.10 per share represents about a 15 percent premium over Packeteer's Friday closing price of $6.18. After the deal was announced Monday, Packeteer's shares on the Nasdaq were up $0.78 at $6.96.



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