Force10: Where's the Exit?

LAS VEGAS -- Interop -- After Juniper Networks Inc. (Nasdaq: JNPR) recently spent half a billion dollars snapping up Peribit Networks Inc. and Redline Networks Inc., M&A chatter has turned to who Juniper didnt buy, rather than who they did (see Juniper Takes Two: Peribit & Redline and Juniper's Kriens Stuck On Traffic).

One name that often enters this conversation is Force10 Networks Inc. Often thought to be one of the potential means for Juniper to enter the 10-Gigabit Ethernet switching market, Force10 has so far been left out of the dance. Is time running out?

Foundry Networks Inc. (Nasdaq: FDRY) launched its new BigIron RX-16 switch on Monday, and that new high-end, fault-tolerant, 10-Gbit/s box further brings Force10's high-end dominance into question (see Foundry Flashes New Hardware). In addition, plummeting prices in Gigabit Ethernet gear point to Force10's biggest dilemma: the longer it waits to take the next logical stop in startup development -- acquisition or IPO -- the more it risks losing its startup edge, as larger public companies catch up in the technology race.

”Right now they have a good competitive position. They’ve been the leader in port density, but their position becomes compromised as competitors catch up,” says Stephen Schuchart, a senior analyst with Current Analysis.

Neither Force10 nor Juniper will comment on acquisition speculation, but Force10 vice president of marketing Andrew Feldman says that the company is being built as a self-sustainable entity, and that it has a "half-dozen" new customer projects in the works. Feldman also downplays concerns about the competition, saying that Force10 uses custom chips while the competition is relying on merchant silicon.”The highest-caliber customers we have don’t think that 10-Gig is becoming a commodity any time soon," says Feldman. "Density is important, and staying up is important."

But if Force10 is the leader in the 10-Gig market -- and if Juniper is still in the hunt for leading enterprise switching technology -- why hasn't a deal happened? Top Silicon Valley sources say it’s almost common knowledge that Juniper and Force10 have had acquisition talks several times in the past, but that each time these talks have failed because Force10 has been holding out for too much money -- well over $500 million. These sources say that the sticking issue has always been price.

One Silicon Valley venture capitalist points out that because the company has raised and invested so much money in its product, it has no choice but to ask for a big price tag. Force10 hasn’t said how much total funding it has raised, but sources estimate that $200 million to $300 million has been pumped into it. That means investors would likely want at least $500 million to make a tidy profit, and Force10 is believed to be asking for more.

Recent developments may soon bring Force10's exit strategy to the fore again: Foundry’s stock price has lost almost half its value in the past six months, giving it a market capitalization of a little more than $1 billion, which could lead folks to take a second look at it as acquisition bait (see Juniper's Extreme Thoughts Are Back).

Lower prices for public companies would lower the market value for Force10. Meanwhile, heated competition among Force10, Foundry, Extreme Networks Inc. (Nasdaq: EXTR), and Cisco Systems Inc. (Nasdaq: CSCO) is putting further pressure on 10-Gbit/s profitability, bringing the cost of these switching products below $5,000 per port in some quarters.Analysts say that if Force10 forgoes the acquisition route, it's going to have to survive by building on its customer base in the high-end data center market, at which its product is targeted, and by trying to charge a premium price for its own ASICs. But how big is the market? And how quickly could Force10 become profitable?

"They've got the high-end data center play, but it could be a very limited market," says Current Analysis's Shuchart.

Force10's Feldman laughs off this notion. Feldman notes that Force10 currently has 120 customers. "The addressable market is 3 to 4 billion dollars," he says.

— R. Scott Raynovich, US Editor, Light Reading