(Recasts; adds details, background, analyst comments, share movement)
By Sayantani Ghosh
BANGALORE, April 21 (Reuters) - Internet monitoring equipment maker Blue Coat Systems Inc BCSI.O said it would buy rival Packeteer Inc PKTR.O for about $268 million in cash to gain a firmer foothold in the WAN optimization market.
Blue Coat's $7.10-a-share offer is 15 percent more than the WAN (wide area network) hardware maker's closing share price on Friday. On Monday, Packeteer shares rose as much as 13 percent to $7.00 on Nasdaq.
WAN optimization devices speed applications across such networks without companies or organizations requiring to upgrade bandwidth.
The deal comes a month after Packeteer rejected hedge fund Elliott Associates' offer to buy the company for $5.50 a share, valuing it at about $200.6 million.
But the prospect of a bidding war was diffused as Blue Coat said Elliott would end its tender offer for Packeteer. The hedge fund will sell its 9.9 percent stake in the company to Blue Coat at the deal price.
"I think it's an expensive deal," Manuel Recarey, an analyst from Kaufman Bros Equity Research, said in reference to Blue Coat's offer.
When Elliott had made its bid for Packeteer, Recarey had said he did not expect other bidders as the hedge fund's offer was at a premium to the company's peers.
The Blue Coat deal values Packeteer at more than 37 times estimated 2008 earnings, while Elliott's offer had valued the company at about 27 times forward earnings.
The communications equipment sector trades at a multiple of about 32.
But Recarey said if the deal managed to add to Blue Coat's earnings, the steep price might end up being reasonable.
The acquisition is expected to add on a non-GAAP basis to the second full quarter after the deal is completed, Blue Coat said in a statement.
Blue Coat has a history of successfully buying companies and integrating them, Recarey said. But given Packeteer's current assets, he believed that the integration may be more difficult now than in the past.
Small and mid-sized companies operating in the networking hardware market have felt the ravages of stiff competition over the past year as they try to weather concerns that an economic slowdown in the United States may hurt future growth.
Packeteer's shares had lost more than a third of their value over the past year, while Blue Coat has lost about 40 percent of its market value in 2008.
In an intensely fragmented market, led by Riverbed Technology Inc RVBD.O, Cisco Systems Inc (CSCO.O) and Juniper Networks Inc JNPR.O, Packeteer's buyout is expected to trigger consolidation in the industry.
Though the big players would retain their lead, Blue Coat's merger with Packeteer would probably put it up as the fourth in command.
Blue Coat said it will fund the deal through a combination of available cash and an $80 million convertible notes financing.
Merrill Lynch & Co. acted as exclusive financial advisor to Blue Coat in connection with the deal, the company said.
Shares of California-based Blue Coat Systems were trading down 2 cents at $19.75 at afternoon trade on Nasdaq. (Editing by Pratish Narayanan)