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Bluestone files for IPO

Bluestone Software files with the SEC for an initial public offering, joining a growing list of start-up Web application server makers who are going public.

Bluestone Software has filed with the Securities Exchange Commission for an initial public offering, joining a growing list of start-up Web application server makers who are going public.

Persistence Software's stock has jumped from $11 to about $17.25 since it made 3 million shares of stock available two weeks ago.

SilverStream filed for an IPO last month. GemStone Systems filed for an IPO last July, but its efforts have not yet come to fruition.

The question is whether investors find application servers--the software that helps businesses create e-commerce Web sites--as sexy as a Yahoo or Amazon.com. Analysts believe investors do.

"Web application servers are complex entities that form part of the infrastructure and therefore they are not as immediate or fall off the tongue as an eBay or auction site or anything with an 'e' in front of it," said analyst Martin Marshall, of Zona Research. "But while they aren't as immediate, people will begin to see it as an infrastructure play."

The companies are going public mainly to help them survive in the crowded application server market, where they compete with heavyweights like IBM, Microsoft, Sun Microsystems, and Oracle, said analyst Ben Sim, of C.E. Unterberg, Towbin.

Bluestone, Persistence, and SilverStream are a few of the remaining independent application server vendors left, he added.

A year ago, three app server start-ups were gobbled up by bigger companies that saw the software as critical for their product portfolio. Sun purchased NetDynamics; Netscape bought Kiva; and BEA Systems picked up WebLogic. The average purchase price was about $180 million for the software used to build e-commerce Web sites. App servers sit on the server, between Web servers and back-end databases, and they ferret out transactions and perform the business logic--or the rules and regulations--of applications.

Forrester Research believes the app server market will grow to $2 billion by 2002, but that the number of app server makers will eventually dwindle from about 50 today to just a handful of survivors.

"The only route Web application server makers had taken was to sell themselves to larger companies. Persistence has pioneered in this area to say, 'we'll stand on our own and what does the world think our valuation is?'" Marshall said. "That's an interesting proposition--these were extremely technology savvy companies who did the acquisitions. Netscape, Sun, and BEA appreciated the role the app servers play in Internet commerce."

Persistence's performance serves as a bellweather for how other app server vendors will do in Wall Street. While Persistence's shares haven't soared to the $100 market like Ariba's have, Persistence's IPO was successful for the firm, Marshall said.

"It's not an Ariba. It's not a Juniper. But an increase from $11 to $18 is a 50 percent increase. That has to qualify as a success," he said.

Bluestone executives believe they will perform as well or better than Persistence because its product portfolio is bigger. Not only does Bluestone offer an app server, it also sells XML tools, said John Capobianco, Bluestone's senior vice president of marketing. XML, or Extensible Markup Language, is a new Web standard that makes it easier for businesses to exchange data with each other.

Bluestone recently secured $25 million from investors in its third round of financing. According to its SEC filing, the company lost $4 million on $9.7 million in revenue in 1997, and it lost $12.5 million on $8.1 million in revenue in 1998. Revenue from its Sapphire/Web application server has increased, however. Revenue from software licenses and services rose from $4.5 million in 1997 to $7 million in 1998.

Marshall said application server vendors are seeing huge revenue growth. But the market should consolidate within two years.

"Right now, everyone's winning," Marshall said. "There's more business out there than can be handled because everyone is converting to e-commerce."