Brocade acquires McData

Brocade Communications Tuesday announced that it intends to acquire McData in a deal valued at $713 million.

Both companies compete with each other in the Fibre Channel switch market. The acquisition signals further consolidation of this market – in 2005 McData acquired CNT, a switch maker that acquired InRange in 2003. Also in 2003, Broadcom acquired the assets of a defunct Gadzoox, an early Fibre Channel switch maker. Now only Brocade, Cisco and QLogic remain. All three firms supply gear to storage systems manufacturers such as IBM, EMC, Sun and HP.

"The issue most people should be interested in is that there is an almost complete overlap in the technology, their OEM relationships and their customer set," says Mike Karp, senior analyst for Enterprise Management Associates.

"This is clearly a positioning move against Cisco, who has been known to buy out competitors to get them out of the marketplace," says Karp.

There is also concern among analysts that Brocade will have trouble integrating all the products it acquires. After all, McData has products from acquisitions of Sanera, Nishan Systems and CNT.

"The CNT products - distance extension and professional services still work," says Randy Kerns, an independent storage analyst. "The McData Intrepid 10000 Director will probably not continue. The Nishan [Internet Fibre Channel (iFCP)] routers are interesting, though I'm not sure about that because Brocade has a competing product that is more expensive."

Brocade expects efficiencies from the deal of about $100 million by the fourth quarter of combined operations. Much of these efficiencies gained will come through head count reductions.

"One of the things I found interesting in this deal is that Brocade is saying that sales will be about $100 million accretive," says Greg Schulz, senior analyst and founder of StorageIO. "Finally there is some reality when it comes to merger mania math - hopefully there will be a better upside than that, however, hats off to [Brocade CEO] Klayko for a realistic view."

McData will become a wholly owned subsidiary of Brocade. With the exception of John Kelley, McData CEO, who will serve as an advisor to Brocade, other McData executives will remain in their current roles.

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Copyright © 2006 IDG Communications, Inc.