Brocade Takes Aim at Cisco (Juniper)

Who's got the most to worry about as Brocade absorbs Foundry? Maybe it's not Cisco

July 23, 2008

4 Min Read
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Brocade Communications Systems Inc. (Nasdaq: BRCD) is making it no secret that yesterday's $3 billion offer for Foundry is a way to take on Cisco Systems Inc. (Nasdaq: CSCO) in the data center. (See Brocade to Acquire Foundry.)

Cisco might not be the company that needs to worry most about the deal, though.

"I think it was more aimed at Juniper Networks Inc. (Nasdaq: JNPR) than at Cisco," says Sam Wilson, an analyst with JMP Securities . "People are trying to find out who's going to lead the ABC club -- 'Anybody But Cisco' -- and Juniper was leading that club."

In fact, the deal might be most worrisome not for Cisco, but for the other data center players that are seeing competitors get bigger. While it's on a lesser scale, Blue Coat Systems Inc. (Nasdaq: BCSI) recently picked up Packeteer Inc. (Nasdaq: PKTR). (See Blue Coat Plucks Packeteer for $268M and Blue Coat Finally Bags Packeteer.)

That deal, combined with Brocade's move, opens up questions about whether Nortel Networks Ltd. (NYSE/Toronto: NT), Citrix Systems Inc. (Nasdaq: CTXS), and F5 Networks Inc. (Nasdaq: FFIV) need to do some merging too.The deal "could spur action from a host of others ranging from Juniper to F5, to potentially Hewlett-Packard Co. (NYSE: HPQ)," Citigroup analyst Paul Mansky writes.

Then again, Mansky adds, maybe Brocade acted defensively, its hand forced by Ciscos growing data center presence.

"An uncontested Cisco presence across all decision makers spanning all three data center layers makes them all the more formidable," he writes in a note released this morning.

Regardless of the exact target or motivation, Brocade has launched an ambitious plan to become a data center force, countering programs like Cisco's Data Center 3.0, centered on the Nexus line of switches, or Juniper's Ethernet offensive launched in January with the EX product line. (See Cisco's Nexus Targets Data Center's Future and Juniper Storms Into Ethernet Switching.)

"There's no end-to-end competiton to Cisco, and we offer that now," says Marty Lans, Brocade's senior director of marketing for the data center. ("Now" refers to the fourth quarter of 2008, when the deal with Foundry is expected to close.)The price tag seems to worry investors, who sent Brocade's shares down $1.83 (22%) to $6.50 by late afternoon.

At issue is the fact that Brocade is paying about $19.25 per share for Foundry, 41 percent more than Foundry was worth last night. Foundry shares were up $4.42 (32%) at $18.08 late today.

"I've heard there was no other bidder for Foundry. It's clear that Brocade wanted to buy Foundry," Wilson says.

Other evidence: Brocade passed up less expensive Ethernet options like Force10 Networks Inc. and Woven Systems Inc.

"If all they wanted was an Ethernet switch, there's plenty of companies they could have bought. They didn't want that. They wanted big, too," Wilson says.Arming for battle

One thing's for sure: Brocade's rhetoric is targeted at Cisco.

Plenty of companies want to take Cisco down a notch, but most are vendors of Ethernet or IP equipment, Brocade's Lans notes. In other words, they're trying direct attacks on Cisco's own, well defended, turf.

"We're coming at it from a position of strength, from inside the data center out," Lans says."We're good within the four walls of the data center," but Foundry would bring Brocade beyond that point and into the wiring closet and the wide-area network.

Brocade is already in the data center, offering products for server-to-storage connectivity, and it's expanding its view to include server-to-server links. (See Brocade Busts Out HBAs & FCOE Roadmap.)Brocade also holds solid market shares in Fibre Channel and Ficon connectivity -- two areas that are relatively new to Cisco.

While Cisco has Fibre Channel gear in the form of the MDS line from Andiamo Systems, its flagship Nexus box is focused on Ethernet and FCOE. (See Storage Must Wait for Cisco's Data Center Vision .)Brocade has outfitted its gear to handle both Fibre Channel and FCOE, and with Foundry, it would get a substantial Ethernet portfolio as well.

"We're very bullish on it [FCOE]. We just don't think it'll roll out as quickly as the market thinks," Lans says.

— Craig Matsumoto, West Coast Editor, Light Reading, and James Rogers, Senior Editor, Byte and Switch

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