* Brocade's purchase of McData is about survival against Cisco's storage onslaught
Last week Brocade announced its intent to acquire McData, an event that is interesting on a number of levels. The stated rationale, that this will create a “broader range of solutions and services that protect and extend customers’ existing investments in [storage-area networking] infrastructure,” and that it will “accelerate the pace of innovation to deliver next generation solutions to address customers’ information management challenges” is of course an industry-standard platitude for this sort of occurrence. But what does it really mean?
First, the acquisition marks a departure from Brocade’s mainstream acquisition strategy of going after individual pieces of technology from relatively small firms. Despite Brocade’s assertion about creating “a broader range of solutions and services that protect and extend customers’ existing investments …” this new acquisition is not technology-based. Rather, it is driven by another, equally pragmatic reason.
Consider the looming specter of Cisco, Brocade’s giant competitor that continues to invade the networked storage space. The Brocade-McData combo has revenue of about $1.3 billion, a considerable sum to be sure, but hardly in the same ballpark as Cisco’s $27 billion number. While it’s true that most of Cisco’s revenues do not come from storage networking, having all that cash from whatever source provides for some very deep pockets whenever the company does decide to add another company or two to its family.
Consider a large part of this acquisition as a preemptive strike by Brocade to prevent Cisco from gobbling up another competitor.
In order for the new Brocade to be competitive, it will have to achieve efficiencies in every area of operation. In some cases, this will be easy, in others it will not. Brocade has promised that within four quarters of closing the deal, the combined company will achieve annual savings of $100 million. Where will the savings come from?
The good news for Brocade is that it acquires a company awash with technology talent. The bad news is that much of this talent is redundant rather than complementary to what Brocade already has in-house. This circumstance is in fact symptomatic of the greater challenge the combined company faces: the product sets are almost completely redundant and so are the customers. In light of this, it is not difficult to understand where the promised $100 million in annual savings will originate: I expect to see significant downsizing across McData in the technology, sales, marketing, field support and administrative functional areas. It is likely that Brocade will seize this as an opportunity to do some of judicious pruning of its own staff as well. I hope I’m wrong, but I suspect I’m not.
The key to success for the new Brocade will be how well the company rationalizes its new product portfolio, identifying and then eliminating all areas of redundancy. What makes this all the more challenging is that McData itself is still in the process of digesting some major acquisitions (CNT and Sanera). Once the deal closes, probably towards the end of this year, Brocade will have to kick off a substantial effort to extract efficiency from this tangle of products, supporting technologies and corporate cultures.
If it is successful in trimming the fat, in four quarters Brocade may well have a much stronger market position vis-a-vis Cisco. We’ll have to wait and see whether it will be strong enough.
Brocade also tells us that this deal will benefit its OEM partners “by reducing operational costs, accelerating investment in differentiated solutions to jointly develop new markets, and deliver higher levels of support and service.” Sure it will – markets always benefit when the number of suppliers is reduced to two. Still, perhaps this will create openings for QLogic at the high end.
Finally, all this comes at a time when the primacy of Fibre Channel-based SANs is being challenged in enterprise IT rooms by several emerging technologies, including InfiniBand, iSCSI and Storage over IP (SoIP). Still, Fibre Channel SANs are the norm today, and the standard against which all the others are measured. It’s true, end users, OEM partners and resellers will have one less choice available when they look for a switch provider; however, limited choices notwithstanding, Brocade will at least be a more viable competitor to Cisco.
