McData Bags CNT for $235M

McData Corp. (Nasdaq: MCDTA) has confounded the experts once again, deciding to snap up Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) for $235 million (see McData to Acquire CNT and Investors React to McData-CNT Chatter).

The deal, which was rumored to be in the works last Friday -- yet discounted by some analysts -- is designed to help McData see off the challenge of rivals Brocade Communications Systems Inc. (Nasdaq: BRCD) and Cisco Systems Inc. (Nasdaq: CSCO). McData is the market leader in director switches, but its share has been steadily eroded by Brocade and Cisco in the last year (see SAN Switch Year-End Summary and McData Merely Mediocre).

Integration won't be easy: McData and CNT both have a little over 1,000 employees apiece, and whether CNT's Minneapolis headquarters will continue to operate along with to McData's Broomfield, Colo., offices, remains to be seen.

Also unclear is whether the CNT executives will stay on. CNT CEO Thomas Hudson, one the industry's best-paid execs (see 2004 Top Ten: CEO Payouts), will join the board of the merged company, along with another undesignated CNT exec. But it's not clear whether Hudson or others will continue to hold full-time jobs with the company.

The markets response to the news was decidedly lukewarm from a McData perspective, and downright negative from the perspective of CNT shareholders. In early trading this morning, McData’s shares rose 13 cents (3.28 percent) to $4.09. Shares of CNT fell 97 cents (14.65 percent) to $5.65.So does this mean McData is getting a good deal?

David Freund, analyst at Illuminata Inc. believes that the jewel in CNT’s crown is the UltraNet Multi-service Director (UMD), which CNT acquired when it bought Inrange Technologies for $190 million (see CNT Walks Off With Inrange and CNT Ships UltraNet Director).

”InRange had a reputation as an up-and-coming challenger in the director switch market -- it certainly makes CNT more attractive,” he says.

The UMD technology has more than proven itself in the form of new sales. The device is now credited with saving the company’s bacon after a period of heavy losses and layoffs: “The UMD is basically what pulled CNT out of its dive,” says Freund (see CNT Takes a Hit).

The device achieved significant sales in its first two months of shipping, buoyed by an OEM deal with IBM Corp. (NYSE: IBM). (See CNT Gets UMD Bounce and IBM Confirms CNT Router.) CNT was already in talks with EMC Corp. (NYSE: EMC) and other storage vendors about similar deals, which could help make the technology a potential cash cow for McData.However, McData launched its own high-end device, the Intrepid i10K, earlier today (see McData Announces Intrepid i10K). Speaking on a conference call this morning to discuss the CNT acquisition, McData CEO John Kelley admitted that there is an overlap. "There's no question, with the UMD and the i10K, we have to get that reconciled," he said. However, he was tight-lipped on the specifics of the merged company's product roadmap.

Nonetheless, Kelley predicts that the deal will support McData’s Global Enterprise Data Center strategy, an initiative to allow users real-time access to data center information from anywhere in the world. McData’s CEO said that CNT’s “distance expertise” will add to the initiative. This will be particularly noticeable in Europe, where CNT already has a strong presence, he added.

Other execs say McData's purchase of CNT is aimed at the telco market. "The merger is a logical extension of where we're heading," says Brook Reams, director of strategic technologies at McData. CNT's experience in design and delivery of products to the telco sector will reassure OEMs of McData's capabilities in that arena, he maintains.

Under the terms of the agreement, CNT shareholders will receive 1.3 shares of McData Class A common stock for each share of CNT common stock they hold. Upon completion of the transaction, which is expected in McData’s fiscal second quarter 2005, McData and CNT stockholders will own approximately 76 percent and 24 percent, respectively, of the combined company.

— James Rogers, Site Editor, Next-Gen Data Center Forum0