The rumors have their origin in a report from analyst Paul Mansky of investment banking firm Canaccord Genuity, which has rated Brocade's stock a "buy" for the last year. The report certainly helped people who'd followed his advice, as the stock spiked about 10% last week soon after the report was published. Mansky's analysis appears to be well-founded: In addition to a gap in Dell's storage portfolio and a stagnant PC market, he cites a recent shelf filing with the FCC. This will allow Dell to borrow up to $3.5 billion from the public markets, something that a profitable company with more than $7 billion in the bank could only use for an acquisition. So if not Brocade, it's clearly shopping for something.
To add fuel to the fire, Dow Jones reported comments from Michael Dell in which he said that his company would continue to grow through acquisition and is particularly interested in storage and integrated offerings. In theory, buying Brocade could help Dell offer a more integrated storage offering, adding data center Fibre Channel and Ethernet networking to its servers, storage appliances, and storage virtualization portfolio. Dell already has a history of betting big on storage acquisitions, with its $1.4 billion buy of iSCSI company EqualLogic in 2007 and its $820 million purchase of SAN vendor Compellent in December of last year.
While it's easy to see why Dell might be interested in Brocade, it's harder to see how the two would fit together in the long term. Mansky suggested that Dell's traditional PC market is in decline thanks to tablets, an exaggeration that has an element of truth: Though few tablet users are throwing out their PCs, tablets have displaced laptops in some consumer and business applications and most of those tablets aren't made by Dell. The problem is that at least as strong an argument can be made about Brocade's traditional business, Fibre Channel networking. Just as PC applications are moving to tablets, Fibre Channel applications are moving to Ethernet. And though Fibre Channel will be around for a while, the PC will be around for a lot longer.
Brocade is aware of this, of course, and in some ways it's actually a part of the migration. Thanks in part to its acquisition of Foundry Networks, it offers customers converged Fibre Channel and Ethernet switches that promise to unite the two. With Cisco and other switching players all promoting an Ethernet-centric data center that reduces Fibre Channel to virtualized links, this is a distinctive vision that should enable Brocade to hang on to a lot of its loyal Fibre Channel customers. The disruption of an acquisition by Dell could change all of that, as it's clear that Dell is focused on Ethernet too.
What Dell ought to do is invest some of its $7 billion cash pile in research and development. Its problems in the tablet market stem from its dependence on Intel and Microsoft (and now Google) and the way to fix that is through innovation of its own. As Cisco is learning, acquisition is no substitute for that.
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