NetDynamics deal reflects boom

Sun declined to disclose the price of the stock-swap acquisition, but rumors have put the value of the deal in the $160 million-to-$170 million range, a steep price for a company that has yet to turn a profit. But the buyout, combined with Netscape Communications' $180 million purchase of Kiva Software last fall, already has market watchers--and giddy Sun executives--comparing the application server market to the boom days of relational software back in the 1980s.

"The application server is the most exciting technology since the relational database for the enterprise," Sun chief operating officer Ed Zander said yesterday.

That may be something of an overstatement, at least so far, but analysts do agree that that the market is maturing--and quickly consolidating. "Small companies with transaction servers are now prime buyout candidates," said Martin Marshall, an analyst with Zona Research.

Why the sudden surge in interest? E-commerce applications, for starters. Application server software provides the so-called middleware connections between Web-based clients and back-end databases and enterprise resource planning applications.

Also, application servers theoretically let systems become more flexible and easier to build. For instance, the rules defining how a bank's customers can obtain their account information might be hardcoded into a mainframe application. To write a new system that uses those same rules, you need to re-create them.

But by separating the rules in a middle layer of code, residing on an application server, they become accessible to multiple applications and can be reused. The potential payback from the NetDynamics and Kiva acquisitions could make their seemingly high acquisition prices a bargain.

Sun, for example, gets a ready-made application server that it can sell today, without any changes. And the company gets NetDynamics' customers, which include industry giants like AT&T and Chevron.

Also, with NetDynamics, Sun jumpstarts its software division. "This [acquisition] represents a step for us into the value-added food chain for software," Zander said on a conference call yesterday. "It will underscore that Sun is not only a great workstation and server company but now a software company too, with Java and Solaris."

Sun can bundle NetDynamics with its server hardware to offer a potent combination for e-commerce system builders.

Modifying NetDynamics, one of the first application servers on the market, to comply fully with Enterprise JavaBeans and other Java initiatives from Sun will take some work. But that shouldn't be a major issue for Sun, analysts say.

NetDynamics, on the other hand, gets a well-heeled parent that can afford to pay for the coding needed to complete the corporate JavaBeans and other support.

Oracle, IBM, Sybase, and Microsoft already have application servers, in one form or another.

Among the major database makers, only Informix Software lacks an application server of its own. That could mean the company will soon be in the market.

With NetDynamics and Kiva already spoken for, the remaining players are few, Marshall said. "It comes down to companies like Bluestone and WebLogic. Those will be the bridesmaids carrying the bouquets next time," he said.

Both companies are also rumored to have negotiated with Sun before the NetDynamics deal, sources said. Another potential acquisition target could be Gemstone, an object database provider that has morphed into a middleware company.