July 1, 1998 6:10 PM PDT

Sun buys NetDynamics

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November 24, 1997
Sun Microsystems today announced a deal to buy application server software maker NetDynamics, underscoring Sun?s push into software from its primarily hardware roots.

As expected, the acquisition will be a stock-for-stock merger, but Sun declined to disclose the price of the transaction, saying the complicated deal will require additional time to value.

Sources close to Sun indicated that a reported $160 million pricetag is "not entirely accurate." The deal is still subject to regulatory approvals, as well as NetDynamics' shareholder approval, but is expected to close within 60 to 90 days.

"This very significant acquisition positions Sun as the leading provider of enterprise software for network computing," said Ed Zander, Sun's chief operating officer. "We have been looking at trying to evolve our middleware offerings to offer [customers] the ability to connect this emerging Web-top environment to their [legacy systems]."

Alan Baratz, president of Sun?s reorganized software group, said the acquisition "validates and strengthens the application server and enterprise server rmarkets," calling application servers "one of the central components of network computing marketplaces."

Privately held NetDynamics recently announced support for JavaSoft's enterprise JavaBeans. The company was founded in 1995 and is based in Menlo Park, California. Its cofounder and chief executive is Zach Rinat.

No layoffs are expected to be leveled at NetDynamics? staff of 170 employees, Zander said. The company's sales staff will become part of a new Sun sales force for its software products, created in a reorganization completed today.

NetDynamics developers will join Baratz?s developer group, but will remain dedicated to NetDynamic?s product line, which Sun will continue to market. Sun said a fuller product road map will be announced once the deal closes.

NetDynamics has received three rounds of funding totaling $15.4 million. Investors include Hummer Winblad, U.S. Venture Partners, Intel, The Galleon Group, Attractor Investment Management, Van Wagoner Capital Management, and Integral Capital Partners.

The company makes application server software and related tools. The software is used by developers to create a middle tier that links Web-based client systems to back end data sources and applications.

Sun expects to include the acquired technology in upcoming software products. The workstation maker also will continue to ship and support NetDynamics' current product line.

NationsBanc Montgomery Securities analyst Kurt King, who follows Sun, said although he has no firsthand knowledge of the deal that it would make sense. The buyout would allow Sun to expand in the Java enterprise market.

"It fits with the direction the company is going," he added.

The market for application software is booming, thanks in large part to the growth of e-commerce applications. International Data Corporation pegs the current application server market as a $400 million-per-year business. By 2001, total application server sales are expected to reach more than $1 billion.

"The deal suddenly catapults Sun into the application server business, and maybe into heavy-duty consulting," said Martin Marshall, an analyst with Zona Research. "Sun has a consulting arm, but 90 percent of their revenues have come from their hardware division. This is a major change in direction, in that Sun now goes into the battle armed with a transaction server."

A host of companies are vying for business in the application server market, including Microsoft, Netscape Communications, IBM, Oracle, and Sybase, among others.

Netscape purchased application server maker Kiva Software last November in a deal worth roughly $180 million.

 

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