McData Sweeps Up Nishan, Sanera

Placing a nearly $200 million bet on the future of storage networking technology, McData Corp. (Nasdaq: MCDTA) today announced that it plans to acquire Nishan Systems Inc., an IP storage networking startup, and Sanera Systems Inc., a high-scale SAN switch startup (see McData Buys Sanera, Nishan).

McData said it will acquire all outstanding shares of Nishan for $83 million in cash and will also assume approximately $2 million of the startup's debt -- well under the more than $100 million that Nishan's VCs had invested in the company (see Nishan Secures $10M Debt Financing).

Meanwhile, McData said it will acquire all outstanding shares of Sanera for approximately $102 million in cash, net of debt and cash on hand; that startup's investors had ponied up a total of $101 million to date (see Can $35M Save Sanera?).

In conjunction with the acquisitions, McData said it will provide between 1.5 million and 1.7 million shares of Class B common stock and about $8 million in cash over the next two years to fund "employee retention programs" for Nishan and Sanera employees. McData said these shares have been separately approved and will be amortized as deferred compensation.

"The powerful combination of Nishan and Sanera's advanced technologies with McData's strong leadership and expertise will allow us to provide customers with unprecedented value, choices, and solutions delivered seamlessly from a trusted and reputable partner," said John Kelley, McData's president and CEO, in a prepared statement. "McData is changing the future of storage networking."McData said its SANavigator and Enterprise Fabric Connectivity Manager (EFCM) software will be extended to support the new technologies and services.

Separately, McData announced today that it has entered into an agreement with storage chip startup Aarohi Communications Inc. to provide technology for McData's intelligent switch platforms (see McData Signs Deal With Aarohi).

The company also posted financial results for its second quarter 2003, ended July 31, 2003, with record revenues of $107.0 million and net income of $9.1 million, or $0.08 per share (see McData Posts Record Q2 Revenues).

McData's acquisition of Sanera -- which had been rumored to be in the works for several months -- gives it a highly scalable director-class SAN switch that goes well beyond the 140-port switch it offers today. Sanera's switch provides up to 256 non-blocking 2-Gbit/s ports per chassis and provides a "dynamic partitioning" feature that allows multiple SAN fabrics to run over the same physical infrastructure.

Sources indicated that Sanera's VCs initially came to the table with an asking price higher than McData was willing to pay (see Is McData Lowballing Sanera? and Sources: McData to Buy Sanera). Sanera's investors included ArrowPath Venture Capital, CMEA Ventures, Enterprise Partners Venture Capital, Goldman Sachs & Co., Greylock, and Storm Ventures.Meanwhile, McData will get Nishan, founded in October 1998, for a relative bargain. Over the past year or so, Nishan's VCs were said to be shopping the company, approaching potential suitors that included Brocade Communications Systems Inc. (Nasdaq: BRCD), but ultimately could not negotiate a buyout that would give them a return on their overall investment.

The long list of investors in Nishan includes Altos Ventures, ComVentures, Dell Computer Corp. (Nasdaq: DELL), Discovery Ventures, Lightspeed Venture Partners, Raza Foundries, Siemens AG (NYSE: SI; Frankfurt: SIE), Sofinnova Ventures Inc., Sun Microsystems Inc. (Nasdaq: SUNW), and QTV Capital.

Nishan's family of IP storage switches -- which have been certified by several major storage vendors, including EMC Corp. (NYSE: EMC), Hewlett-Packard Co. (NYSE: HPQ), Hitachi Data Systems (HDS), and IBM Corp. (NYSE: IBM) -- connect Fibre Channel SANs with IP networks, and have had the most success in disaster-recovery deployments.

McData said the acquisitions of Sanera and Nishan are expected to close within two months. The Sanera closing is subject to regulatory approvals, and both transactions are subject to certain customary closing conditions.

Todd Spangler, US Editor, Byte and Switch