Brocade (NASDAQ: BRCD) made a bold move late Monday to challenge Cisco Systems (NASDAQ: CSCO) in the broader networking space by agreeing to acquire Foundry Networks (NASDAQ: FDRY) for $3 billion.
Brocade and Cisco dominate the market for storage area networking (SAN) switches, and Brocade's push into Ethernet networks will give the two similar product lineups elsewhere.
"We're good within the data center walls, but not beyond," said Marty Lans, Brocade's senior director of data center marketing. "That's where Foundry comes in, on the other side of the server.
"Cisco offers the same thing outside the data center, and now so do we."
The storage switch rivals have been at work on plans for converged data center fabrics, and Brocade's acquisition of Foundry is part of that strategy (see Cisco, Brocade See One Big Happy Fabric).
"We believe the industry is at an inflection point in the way enterprise and service provider networks and data centers are being architected," stated Brocade CEO Mike Klayko. "Customers are demanding networking solutions that meet the needs for today and can address the many advances in network convergence that are still ahead. Brocade has taken an important step through this acquisition in developing a networking infrastructure strategy that will serve as the foundation for capitalizing on these dynamic opportunities."
However, except where floor space is at a premium say in Tokyo or New York Brocade doesn't see FCoE catching on until pricing comes down a few years from now, said Lans.
Pacific Growth Equities analyst Kaushik Roy had suggested a month ago that Brocade and Foundry merge. He said the deal makes Brocade and Cisco "the only players who can provide end-to-end LAN to SAN data networking," and added that the deal gives Brocade "instant credibility in the emerging converged FCoE market."
"To make sense strategically in the long run, you need to assume wide-scale adoption of converged LAN/SAN networks," Baird analyst Jayson Noland wrote in a research note on the deal. "We believe data center consolidation will continue to be a key initiative for end users, though go-to-market and IT organizational charts could slow the pace of adoption. In the near term, we believe BRCD and FDRY will market the new entity as a more broadly diversified strategic partner and one that is easier to deal with than Cisco."
The acquisition is expected to close in the fourth quarter. The deal has been approved by the board of directors of each company and is subject to approval by Foundry's stockholders, regulatory approval and other closing conditions. Brocade plans to finance the acquisition through a combination of cash on hand at both companies and about $1.5 billion of committed debt financing from Bank of America and Morgan Stanley.
Investors had some misgivings about the price of the deal, which is more than four times greater than Brocade's acquisition of McData two years ago. Foundry's stock rose 32 percent today on news of the deal, while Brocade shares fell 20 percent.