Storage area network (SAN) switch vendor Brocade said Tuesday it would by rival McData for $713 million in shares.
Brocade aims to save $100 million a year through headcount reductions and other cost-savings. Both company boards have approved the acquisition which should complete by the first fiscal quarter of 2007. It is subject to approval by shareholders and regulatory authorities.
McData will become a wholly-owned subsidiary of Brocade with McData CEO John Kelley becoming an advisor to Brocade. Brocade's executive team will remain in their current roles and Brocade will retain the McData name and San Jose headquarters.
Brocade went through some turmoil when CEO and founder Greg Reyes left the company last year. Incoming CEO Michael Klayko had to restate company results, and recruit a new chief financial officer. Klayko has cleaned up and stabilised Brocade and a strategy of expansion outside the SAN space has been developed.
Both Brocade and McData have faced competition from networking colossus Cisco as it entered the SAN switch and director market with its MDS product line. Most customers buy SAN products from IBM, EMC and HP. Hamish MacArthur, CEO at analyst firm MacArthur Stroud, says: "The OEMs probably encouraged the consolidation from the points of view of scale and compatibility." They should be able to buy product at lower cost from the combined company and have fewer incompability problems between switches and directors.
Brocade's VP marketing, Tom Buiocchi, said of the OEMs: "We couldn't speak to them prior to today. I would say their response has been overwhelmingly positive.
It is anticipated that Brocade will seek cost-savings. McData customers must face uncertainty as Brocade looks to cut out overlapping products. (See blog.)
In a message for McData customers Buiocchi said: "We're absolutely committed to their investment protection. They should have a high confidence path to the future." The new company will develop; "robust interoperability and management tools for mixed environments. We can accelerate innovation to being new products to our customers."
MacArthur thinks the combined company will be better able to develop SAN switch-on-a-chip technology currently being worked on by QLogic and Emulex. Notwithstanding that Fibre Channel technology will be around for at least five to ten years, he also reckons that it will be better positioned to respond to IP competition from Cisco, Juniper, Nortel and others.