Is McData Lowballing Sanera?

McData Corp. (Nasdaq: MCDTA) is offering to buy startup Sanera Systems Inc. for $70 million in cash and $30 million in stock at "earn-out," according to a source familiar with the negotiations -- a package that is said to be far less than Sanera's VCs were seeking. "Earn-out" means the startup would receive the stock after the deal closed, depending on the performance of its business.

McData is seeking to acquire the SAN switch company to boost its capabilities in addressing very high-scale fabrics, Byte and Switch reported last week. If such a deal went through, McData, which today leads the market for director-class switches, would be able to add Sanera's 256-port system to its lineup. Analysts say that would let McData leapfrog past Cisco Systems Inc. (Nasdaq: CSCO) just as Cisco starts its concerted run at the Fibre Channel switch market (see Sources: McData to Buy Sanera).

But it appears that McData is offering less than Sanera's investors were asking for. Sanera's VCs were reportedly asking for $175 million.

"Since there is no other potential dance partner... I suspect McData's offer will prevail," says our source.

Sanera has raised $65.3 million to date from CMEA Ventures, Storm Ventures, Enterprise Partners Venture Capital, and others.McData representatives have declined to comment on "rumors." Sanera did not respond to requests for information.

As noted previously, McData has enough cash on hand for such an acquisition, with $230 million in cash and short-term investments as of December 31, 2002. It also raised $172.5 million in February through convertible subordinated notes, which McData said would be used for, among other things, "potential acquisitions" (see McData, Emulex Rake It In and McData Raises $172.5M From Notes).

Not everyone believes Sanera would be taking the right step in agreeing to a deal with McData. Michael Welts, executive VP of marketing for high-scale SAN switch startup Sandial Systems Inc. -- and a potential Sanera and McData competitor -- compares selling out to an established vendor as "waving the white flag."

"When we think about the potential growth in this market, why sell yourself short?" he asks.

But if Sanera does accept McData's reported lower offer, it would be opting for what it sees as the best of all possible outcomes in a market that is still an extremely tough place for startups to try to go it alone.Todd Spangler, US Editor, Byte and Switch