BEA Systems, Inc.

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BEA Systems, Inc.

2315 North 1st Street
San Jose, California 95131
U.S.A.
Telephone: (408) 570-8000
Fax: (408) 570-8091
Web site: http://www.beasys.com

Public Company
Incorporated: 1995
Employees: 1,900
Sales: $464.4 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: BEAS
NAIC: 511210 Software Publishers; 541511 Custom Computer Programming Services; 541512 Computer Systems Design Services

BEA Systems, Inc. is a company that is right in the middle of the burgeoning electronic commerce (e-commerce) marketplace. Originally established in 1995 to provide “middleware,” a type of platform software, to corporate clients who were switching from mainframe computing to distributed client-server systems, BEA developed a family of software and servers to support high-volume e-commerce transactions in real time. Toward the end of 1999 the company repositioned itself as “The E-Commerce Transactions Company.”

Supplier of Middleware to Corporate Clients: 1995–96

BEA Systems, Inc. was founded in 1995 by Bill Coleman, Ed Scott, and Alfred Chuang. All three held management or executive positions with Sun Microsystems Inc. before founding BEA Systems, which was named using the first letter of the first name of each of the three founders. Coleman became BEA’s chairman and CEO. Scott was in charge of BEA’s sales and marketing and served as president and, later, counselor for the company. Chuang would hold a variety of positions at BEA, including chief technology officer, chief operations officer, and president. The New York-based venture capital firm E.M. Warburg, Pincus & Co. invested $50 million for a half-interest in the company.

BEA was established to fill a niche called “middleware.” Middleware is a form of platform software. At the time BEA came into being, mainframe computing was giving way to a client-server environment. In the client-server environment, each client and each server have an operating system, typically Windows for the client and Unix for the server. Middleware was a solution to the problem of how to have applications run on multiple machines. Middleware acts as an operating system in the client-server environment, so that applications can run on the middleware platform.

Rather than inventing platform software from scratch, BEA was interested in a product known as Tuxedo, an online transaction processing monitor. The original program for Tuxedo was developed by Bell Labs in 1983 to enable large numbers of users to simultaneously access and manipulate a database on a mainframe computer. It was then sold to Novell Inc., with variations developed by other smaller companies. In 1996 BEA bought the rights to Tuxedo from Novell, along with much of its independent distribution network. Novell retained ownership of Tuxedo, but BEA would take over development and distribution of the product. Also included in the deal were the core of Novell’s Tuxedo business team, including engineers and programmers who developed Tuxedo, and existing contracts and agreements.

By all accounts Tuxedo had been languishing under Novell, but BEA quickly announced a new suite of products for the fall of 1996. Transaction processing (TP) monitors were beginning to attract the attention of corporate information system buyers as a key component of electronic commerce. BEA also produced a Java interface called BEA Jolt, which extended Tuxedo transaction processing to the Internet. By translating between Tuxedo and Java applets, BEA Jolt would permit any Java-enabled browser or Java program to access the Tuxedo middleware. With Jolt, Tuxedo users could perform transactions with any Java-enabled browser or stand-alone Java application.

By maintaining a continuous transaction state, Jolt would enable electronic commerce to be conducted in real time. In 1996 electronic commerce was limited to placing orders that were processed offline. Jolt also enabled financial applications to be extended to the Internet. The introduction of Jolt gave BEA an edge over competitors such as NCR Corp. and IBM. Significant Jolt partners included Hewlett-Packard Co., Digital Equipment Corp., and Sun Microsystems Inc.

BEA began to expand its sales efforts internationally in 1996. It launched its European operations by opening offices in London, Munich, Paris, and Brussels. It also established subsidiaries in Japan, Sweden, and South Africa, and before the end of the year opened its Latin American regional headquarters in Sao Paulo, Brazil.

Deepening the Product Line: 1997–98

In early 1997 BEA acquired object and messaging technology from Digital Equipment Corporation. ObjectBroker and DECmessageQ, along with Tuxedo, were soon available as part of the BEA Enterprise Middleware Suite. The combined technology allowed BEA to focus on creating an infrastructure for running applications.

BEA completed its initial public offering (IPO), which raised $150 million, in April 1997. Shares were initially offered at $6. By July 1 they were trading at $18. A secondary stock offering in July raised another $150 million. At the time BEA was one of the few companies aside from IBM that was offering platform software. For the rest of 1997 and 1998 BEA’s stock went through a period of ups and downs following the IPO.

In mid-1998 BEA acquired the Top End transaction processing monitor from NCR Corp. for the purpose of combining its technology with Tuxedo, which had become the market leader in TP monitors. Top End had been Tuxedo’s largest competitor. According to one source, Tuxedo accounted for 41 percent of all installed TP monitors in 1998, with Top End holding 13 percent of the market. BEA also planned to proceed with an upgrade to Top End, which was being used by such customers as Wal-Mart, Amazon.com, and Reuters.

By mid-1998 BEA was a major supplier of message-queuing and transaction-oriented middleware. The company launched the M3 Object Transaction Manager, an object-oriented successor to its Tuxedo TP monitor. Such object-oriented TP software allowed servers to process heavy transaction loads generated by Internet traffic. M3 combined ObjectBroker and DECmessageQ, which BEA acquired from Digital Equipment, with Tuxedo. BEA’s goal was to quickly assemble a broad portfolio of middleware products for mission-critical applications.

In September 1998 BEA acquired WebLogic Inc., which made a well-regarded Java-based web-application server, for $192 million in stock. BEA planned to combine WebLogic with Tuxedo to create a reliable method for processing transactions over the Internet. WebLogic had been perfecting its Java-based technology for about three years. The acquisition put BEA in direct competition with Sun Microsystems.

BEA management regarded the acquisition of WebLogic as the company’s most important strategic move since acquiring Tuxedo. WebLogic would be the core of a new BEA division, WebXpress, with BEA cofounder and Chief Technology Officer Alfred Chuang in charge. It was the beginning of a transformation at BEA, from a middleware company to one that produced an e-commerce transaction platform.

“The E-Commerce Transactions Company”: 1999–2000

For its fiscal year ending January 31, 1999, BEA reported sales of $289 million and a net loss of $51.6 million. The company had more than 1,200 employees in 24 countries. In February 1999 BEA introduced eLink, a group of enterprise application integration (EAI) products that integrated new web applications in real time with existing legacy applications. ELink, together with Tuxedo and WebLogic, would become the key components of BEA’s “End-to-End E-Commerce Transaction Solution.”

In April 1999 BEA and Hewlett-Packard (HP) entered into a cooperative agreement, with HP committing $100 million to BEA over three years to develop software and technology to support both companies’ e-commerce strategies. As part of the agreement BEA would put up $50 million over three years and commit 200 employees to the joint effort. The goal of the agreement was to build applications that would provide as much as 80 percent of what would be needed for a company to build an e-commerce site, either for business-to-business or businessto-consumer transactions. As envisioned by HP and BEA, the e-commerce software would be based on the Enterprise JavaBean (EJB) model and run on the BEA WebLogic application server. BEA Tuxedo and BEA eLink would also be part of the applications package. Like BEA, HP was in the process of reinventing itself as an Internet company that offered solutions for electronic commerce. BEA expected that its new partnership with HP would add $100 million in revenues over the next three years.

The year 1999 saw a growing demand for transaction processing software. According to an article in InternetWeek, one bank recorded 15.8 billion transactions through three data processing centers, or 3,300 transactions per minute. Banks were experiencing a rise in the number of transactions because of more online banking traffic and growth through mergers and acquisitions.

Company Perspectives

The vision of BEA’s founders has always been bigger than middleware. Their goal from the beginning was to provide a comprehensive infrastructure for development and deployment of reliable, salable business applications for e-commerce. As the Internet Economy has profoundly transformed the business landscape, BEA too has transformed itself to better serve its business customers by offering the E-commerce Transaction Platform.

Transaction processing included any request that required an automated response, from updating customer records to electronic funds transfers and issuing payroll checks. For many companies, transactions were becoming more distributed, requiring systems that ran transactions across multiple network protocols and server operating systems. These systems also would integrate back-office applications and older legacy systems. They also supported Java and object-oriented programming. Whereas IBM was considered the leader in the main-frame market, BEA’s Tuxedo was the leader in distributed computing with an estimated 60 percent of the market.

The newest transaction processing software incorporated OTM, or object transaction monitors. Newer companies such as lona Technologies and Inprise Corp. were developing OTMs, and BEA was building OTMs into its Tuxedo and WebLogic systems. OTMs enabled companies to support multiple resources and different environments at the database level through a distributed transaction server.

For companies that wanted to build mission-critical applications over Linux, BEA added Linux support to both Tuxedo and WebLogic. After BEA put up a trial version of Tuxedo for visitors to download, there were more than 1,600 downloads within a couple of weeks, reflecting pent-up demand among companies for Linux support.

Internet-based transaction processing was having the biggest impact on the field, making the client-server model obsolete. In August BEA introduced a new version of the enterprise edition of its WebLogic application server with added multiple-language support for Java as well as C or C++. The WebLogic enterprise edition would offer EJB support by the end of the year.

In mid-1999 BEA acquired Avitek Inc., a Java software developed in Boulder, Colorado, with 42 employees, and folded it into the company’s eSolutions division. Other mid-1999 acquisitions included Component Systems LLC, a consulting firm based in Pleasanton, California, which specialized in de-signing and developing large-scale e-commerce applications. BEA also acquired Technology Resource Group Inc., an educational company focused on Java technology, based in Maynard, Massachusetts.

Following these acquisitions BEA began to reposition itself from a middleware company to an e-commerce company. It committed $20 million to rebrand as “The E-Commerce Trans-actions Company” and planned to advertise heavily in major business and trade publications as well as on news web sites and portals. It also took billboard signs in technology centers such as Silicon Valley, Boston, Chicago, Dallas, and New York.

From August 23, 1999 to February 18, 2000, BEA’s stock rose more than 1,200 percent. Revenue for the quarter ending October 31, 1999 was up 56 percent to $126.5 million, and net income, excluding acquisition-related charges, rose 84 percent to $14.4 million. BEA reported that more than half of its licensing revenue for the quarter was tied to Internet projects. BEA also announced a two-for-one stock split and appointed cofounder Alfred Chuang as chief operating officer. Chuang had been devoting his time to sales efforts and the integration of WebLogic. Following the better-than-expected third quarter re-port, BEA’s stock rose to around $82 a share, compared with less than $9 a share the previous November. The company had reported record revenues for 16 consecutive quarters.

BEA’s longstanding business strategy was to develop leading component technology and tools to enable customers to quickly create and implement business applications. Its 120 engineers and support personnel gave it strong technical capability. At the end of 1999 BEA hosted a technology conference in San Francisco, attended by more than 1,000 executives. Testimonials of BEA’s e-commerce platform were delivered by clients such as Hewlett-Packard Co. and Charles Schwab Corporation.

Before the year was over BEA announced a major restruc-turing into four e-commerce divisions: e-commerce software, e-commerce integration, e-commerce component applications, and e-commerce services. Each division head would hold the title of president and report to Chuang.

Toward the end of 1999 BEA acquired The Theory Center Inc., a Boston-based maker of Enterprise JavaBeans (EJB) components, for about $100 million in stock and cash. Its product JumpStart provided 75 percent of an Internet retail application, including order, shopping, and customer management. BEA, together with investment partner Warburg, Pincus Ventures, acquired Symantec Corp.’s Internet Tools Business Unit for $75 million. The acquisition gave BEA more Java technology and tools, including Visual Cafe for Java, and formed the basis of a new company BEA spun off in January 2000 called WebGain Inc. The new company was focused on developing and marketing a Java-based tool set for e-commerce applications.

BEA continued to add to its Java holdings with the acquisition of The Workflow Automation Corporation in March 2000. The company produced a Java workflow-management system that could integrate applications across the Internet. BEA planned to incorporate the technology into its business-to-business collaboration architecture and relaunch it as the BEA E-Process Integrator later in 2000.

Other acquisitions during the first half of 2000 included Softport Systems Inc., a systems integration firm based in New York City. BEA integrated Softport’s 20 employees, who were highly skilled in Java-based e-commerce application development, into its e-commerce services division. BEA added an-other 70 consultants to its e-commerce services division with the acquisition of the consulting and education group of The Object People, which was based in Ottawa, Ontario, Canada. BEA also announced an alliance with Nokia Corporation to integrate WebLogic and the Nokia WAP Server to accelerate the development of wireless e-commerce solutions.

Key Dates

1995:: BEA Systems, Inc. is founded by Bill Coleman, Ed Scott, and Alfred Chuang.
1996:: BEA acquires Tuxedo, a transaction processing system, from Novell Inc.
1997:: BEA completes its initial public offering.
1998:: BEA acquires WebLogic Inc., which makes a Java-based web-application server.
1999:: BEA redefines itself as “The E-Commerce Transactions Company.”

For the fiscal year ending January 31, 2000, BEA reported a 61 percent increase in revenue to $464.4 million. Operating income more than doubled to $51.4 million, and net income, excluding acquisition-related charges, doubled from $4 million to $8 million. One-time acquisition-related charges and other extraordinary items resulted in a net loss of $13.7 million for the year.

By redefining itself late in 1999 as “The E-Commerce Transactions Company,” BEA achieved a high profile in the emerging e-business integration software category. BEA was proving itself a tough competitor in this evolving market, which analysts predicted would grow from $470 million into a multibillion-dollar sector over the next five years. With its eLink, Tuxedo, and WebLogic product lines and a strong service organization, BEA was capable of emerging as the top e-business integrator for companies racing to build web infra-structures.

Principal Subsidiaries

WebGain, Inc.; BEA Systems Europe Ltd. (England); BEA Systems Japan Ltd.

Principal Divisions

E-Commerce Software; E-Commerce Integration; E-Commerce Component Applications; E-Commerce Services.

Principal Competitors

IBM; Microsoft Corp.; Oracle Corp.; lona Technologies PLC; Inprise Corp.; Bluestone Software Inc.; Secant Technologies Inc.; TSI Software Inc.; Lutris Technologies Inc.; Sun Micro-systems Inc.; SilverStream Software Inc.