F5 ripe for buyout, analysts say

SEATTLE--F5 Networks, whose software helps direct Web traffic, probably will be bought soon, after rivals ArrowPoint Communications and Alteon WebSystems were snapped up, analysts said.

Other upstart makers of data-networking equipment, such as Extreme Networks and Foundry Networks, will survive longer, though either or both eventually could be forced to find an acquirer to gain access to more customers, analysts said.

Possible buyers of F5 include Lucent Technologies, which needs to make a move because it's faced with the likely loss of an agreement to resell Alteon's switches under its own name, analysts said. Last month, Alteon agreed to be bought by Lucent archrival Nortel Networks for about $8.15 billion in stock. F5's software helps balance loads of Web traffic among computer servers.

"You definitely have to consider F5 as a potential buyout candidate," said Brent Bracelin, an analyst at Pacific Crest Securities, who rates F5 stock a "buy."

Seattle-based F5 has a market value of about $1.06 billion. Other F5 rivals that could be bought by larger networking-equipment makers include Resonate, which has a market value of $1.09 billion after going public earlier this month, and closely held Top Layer Networks, said Michael Speyer, an analyst at researcher Yankee Group.

F5 shares on Friday rose 12.5 cents to $48.13 on the Nasdaq Stock Market. The shares have fallen 69 percent since setting a record high of $160.50 on Nov. 1.

F5 spokeswoman Alane Moran declined to comment beyond saying in an e-mail that "F5's goal is to build a company with a long-term game plan and strategy." Cisco Systems, the No. 1 maker of Internet equipment, bought ArrowPoint in June for $4.7 billion.

The market for load-balancing appliances made by F5 and others, which totaled $136.3 million last year, is forecast to rise 86 percent to $253 million this year and surge to $767 million by 2004, according to market researcher Dell'Oro Group. F5 sells equipment that combines its own software with Intel microprocessors.

F5 is losing ground to Cisco, according to Dell'Oro figures. In the second quarter, F5 sold $23.6 million of load-balancing appliances for a 28 percent market share, compared with $41.3 million and 49 percent for Cisco. In the first quarter, F5 had a 34 percent share to Cisco's 37 percent.

Other rivals in the market include Intel, Nortel and Radware. Ltd. F5 also has licensed its software to 3Com and Extreme for use in their products, and it's agreed to let Dell Computer resell F5 products under its own label.

F5's biggest customer is Exodus Communications, which manages Web sites for more than 2,000 businesses and also resells F5 gear. Exodus accounted for about 13 percent of F5's $29.2 million in sales last quarter.

"Clearly, load balancing is an absolutely strategic technology, and a networking vendor is going to be at a considerable disadvantage if they don't have load balancing technology," said Erik Suppiger, an analyst at Chase H&Q, the investment bank that managed F5's initial public offering in June 1999.

Other possible buyers of F5 include European telecommunications-equipment makers such as Marconi, Alcatel and Siemens, analysts said.

"Alcatel, Siemens and Marconi are all reasonable, attractive players in the marketplace that would like to build the scale of their business," Salomon Smith Barney analyst Alex Henderson said.