BEA aims for app server market

Add BEA Systems to the list of companies sweeping up Web application server vendors.

BEA today agreed to shell out approximately $192 million in stock to acquire WebLogic, maker of one of the hottest software products on the market: Web application servers.

The issuance of 7.7 million shares may seem like a steep price, but it is one that BEA executives said is vital to keep the company's market position and remain competitive.

"The WebLogic acquisition is BEA's most important strategic move since we acquired Tuxedo nearly three years ago," Bill Coleman, chairman and chief executive of BEA, said in a statement. Tuxedo is a transaction processing middleware system that BEA bought from Novell.

"BEA is taking a bold step to expand our [product offerings] for customers doing significant business over the Web, and in doing so we are seeking to reshape the application server market," Coleman continued. "WebLogic will be the cornerstone of our e-commerce [system]."

But BEA's "bold step" comes on the heels of its competitors' run on the market. Netscape Communications last year bought Kiva Software for $180 million, and Sun Microsystems in July bought NetDynamics for approximately $160 million to $170 million, apparently without much concern that NetDynamics had yet to turn a profit.

"The application server is the most exciting technology since the relational database for the enterprise," said Ed Zander, Sun's chief operating officer, at the time of the purchase.

So what is making these companies trip over each other and pay up to ten times the worth of a company to gain the Web application technology? For one, it's the opportunity to sell all sorts of other products on top of the Web server, according to Ted Schadler, analyst at Forrester Research.

"Our survey of Fortune 1000 companies showed that two-thirds want to have an application server standard in place by next year, and the reason is they want to buy Web applications like crazy," Schadler said. "But the real value is going to be selling stuff on top of the application server like database servers."

For BEA, it is the opportunity to sell its transactional middleware to companies, a high-priced item that stands to bring the San Jose-based firm many profitable quarters.

"BEA built a core Corba-based middleware system--but the problem is, no one buys middleware," Schadler said. "So now BEA can give its sales force the Web server to sell and they can tell customers, 'Here is a Web application server, but if you want your e-commerce transaction material to tie into your transaction-processing SAP applications, you are going to need our midddleware product to do it.'"

And that is where BEA stands to gain in the market. BEA chief technology officer Alfred Chuang told analysts that while the purchase of WebLogic will "reduce our earnings in the current and next quarter, it will break even in the third, and add to earnings in the fourth."

The acquisition is subject to certain conditions including WebLogic shareholders' approval. The deal is expected to close by September 30.

Reuters contributed to this report.