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Brocade snaffles McData for $713m
The SAN switch project...

By Dawn Kawamoto

Published: Wednesday 09 August 2006

Brocade Communications Systems announced on Tuesday it plans to buy switch maker McData in a stock deal valued at $713m.

Brocade's planned acquisition marks further consolidation in the storage area networking (SAN) market, and it comes as McData faces overall weakness in demand for some of its high-end enterprise products.

Brocade will pay three-quarters of a share of its common stock for each share of McData's A and B common stock. The deal is valued at $4.61 per share, a 62 per cent premium over McData's closing price on Monday.

Last year, Brocade unveiled its Tapestry product line, which is designed to improve customers' management of information stored in their data centres. Brocade has traditionally focused on the low-end market for storage area networks, while McData concentrated on high-end SAN switches.

Merger discussions between the two companies began earlier this year, as Brocade looked to achieve short-term gains through the cost savings and efficiencies of running a combined SAN company, said Tom Buiocchi, Brocade's vice president of marketing.

In the long term, Brocade is seeking to reinvest those cost savings into its research and development department, to quickly address data centre management problems, Buiocchi said.

He added: "One of the biggest opportunities we have identified is file area networks," citing the central management of Microsoft Excel spreadsheets to PowerPoint presentations as one example.

Brocade is likely to migrate to a single platform eventually but the shape it will take is too early to tell, Buiocchi said. He noted that the integration team for the combined company cannot do any work until the deal closes.

Last year, Brocade and McData unveiled the first generation of their interoperability products, and that work will continue post-merger, Buiocchi added.

Brocade also announced its preliminary third-quarter results, which point to higher revenue and profits than the company had forecast.

McData, however, has not been as fortunate. The company issued a warning on Tuesday, indicating its preliminary second-quarter profits and revenues will be less than forecast.

John Kelley, McData's chief executive, said in a statement: "During the second quarter we experienced weakness in [Europe, Middle East and Africa], as well as certain regions within North America. Additionally, overall enterprise demand was down with some of our high-end products."

News of the McData acquisition sent Brocade's stock tumbling 17 per cent, to $5.07 per share, in early trading on Tuesday.

Sam Wilson, an analyst at JMP Securities, said: "Investors are probably reacting to the price Brocade is paying for McData."

He noted the deal nonetheless makes sense and will bring Brocade a huge base of customers in the high end of the SAN market.

Over the next year or two, the transaction is expected to lead to cost savings and better operating results, as well as improved profit margins, for Brocade, Wilson added.

The acquisition, which is expected to close as early as the first quarter, comes as storage makers undergo consolidation. Earlier this year, Iomega acquired managed services company CSCI, while last year, storage giant EMC announced plans to acquire Rainfinity.

Brocade's pending acquisition of McData marks another turn of events for the high-end SAN fibre switch maker. In 2001, McData span off from EMC in a successful initial public offering. But McData has since faced increasing challenges because the Fibre Channel standard on which it relies for data transfer in storage area networks is seeing steep competition from iSCSI, an IP-based standard for linking data storage devices.

CNET News.com's Stephen Shankland contributed to this report

Dawn Kawamoto writes for CNET News.com