I often joked in the past that Fibre Channel switching leader Brocade Communications Systems followed an "old woman who swallowed a fly" acquisition strategy. To bolster its market position, Brocade grabbed Fibre Channel director vendor McData which purchased CNT which purchased Inrange. What was once a market with over a half dozen vendors is now centered on two: Brocade and Cisco Systems.
Even in this enviable position, Brocade faced two dilemmas: One, Fibre Channel itself will be challenged by 10, 40, and 100GbE moving forward. Ethernet, as you know, is the domain of Cisco, Extreme Networks, and Hewlett-Packard but not Brocade. Two, in spite of its success, Brocade really depends upon storage vendors like EMC, IBM, and Sun Microsystems to pull them into deals. The storage device vendors then own the customer.
So how can Brocade fight these trends? Through acquisition. When the market closed on Monday, Brocade announced it will acquire Foundry Networks in a $3 billion-plus deal. This may help Brocade because:
1. It can be transport independent. Brocade could now care less whether users buy Fibre Channel or Ethernet switches--heck, it will gladly sell them both.
2. The Foundry sales force lets Brocade target the customer directly. Cisco is already doing this with hybrid Fibre Channel/Ethernet switches. Brocade will certainly follow.
3. Brocade now has two doors into the data center. It can leverage storage customers for networking introductions or vice versa.
Of course, Cisco is no pushover, and other networking firms like Extreme, HP, and Juniper Networks have pretty good Ethernet switches of their own. Nevertheless, you have to admire Brocade's chutzpah on this one. It has a chance to unify storage and communication networks and fight a much bigger fight beyond the storage back-end alone.
Brocade announced it plans to acquire Foundry Networks, in a deal valued at approximately $3 billion.
Under the agreement, Brocade will pay a combination of $18.50 of cash plus 0.0907 shares of Brocade common stock in exchange for each share of Foundry common stock, for a total value of $19.25 per share, the two companies said in a joint press release issued Monday.
Santa Clara, Calif.-based Foundry is a 12-year-old company that does enterprise and service provider switching and routing. Brocade's CEO praised it as "strong and well-respected" in their industry, during a conference call with investors and media Monday.
It appears that Brocade could be turning a page in a year that has thus far been a public relations nightmare for the company. In January, the company's former CEO was handed a long jail sentence for criminal misconduct. And last month the company found out it would be paying $160 million for Brocade Communications to settle a federal securities class action lawsuit tied to the company's stock option backdating practices.
On the conference call, CEO Mike Klayko said the two companies share a vision for the future of next-generation data centers and networks and that there are plenty of synergies between them that Brocade will take advantage of.
Brocade and Foundry's boards of directors have both approved the deal, but the acquisition is still pending the votes of Foundry's shareholders.
They expect the deal to be finalized in the fourth quarter of this year.
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