Interesting Moves Afoot at Blue Coat Systems

Shares in Blue Coat Systems are up today on two interrelated pieces of news. First, Blue Coat announced that it has accepted a significant private-equity investment from Francisco Partners and Sequoia Capital, which collectively are buying preferred shares worth approximately $42 million.

What’s telling is that the preferred shares contain a liquidation preference, a redemption feature, certain registration rights, and entitle the preferred shareholders to elect one member to Blue Coat’s board of directors.

The other news from Blue Coat today is that the company is using the proceeds of the private-equity investment to acquire the assets of Network Appliances’s NetCache business.

Blue Coat has devised a grandiose strategy of leveraging its Web-proxy franchise so that it can become a major-league player in secure delivery of applications and content. Unfortunately, some big boys — Cisco, F5, Juniper, and Citrix — are in that market already, and it remains to be seen whether the executive team at Blue Coat is ready for that sort of competition.

If you read between the lines, it’s possible to infer that Francisco and Sequoia see a potentially underutilized asset in Blue Coat. With their investment, and their presence on the board, it is conceivable that they are hovering, like private-equity grim reapers, waiting for the executive management of this public company to give them an opening. When and if that happens, you might see Blue Coat reconstituted as a private company, with perhaps a different strategic charter.


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