Brocade/Foundry Readies Ethernet Invasion

SAN JOSE, Calif. -- The buyout of Foundry Networks Inc. (Nasdaq: FDRY) might give Brocade Communications Systems Inc. (Nasdaq: BRCD) a service provider presence, but what really matters to Brocade is the foothold in the 10-Gbit/s Ethernet market, officials said at Brocade's analyst day today.

Giving unusual detail about the thinking behind the acquisition, executives described how Brocade set the wheels in motion two years ago while seeding an aggressive acquisition plan. The service provider angle came as a bonus; in fact, officials didn't say much about their plans for that part of the business.

Brocade's $3 billion purchase of Foundry is expected to close in the fourth quarter, after a Foundry shareholder vote. (See Brocade Takes Aim at Cisco (& Juniper).)

Taking to the stage on crutches, Brocade VP of corporate development T.J. Grewal explained that the hunt for Foundry began with Brocade's planning sessions in 2006, as the company was buying McData. (See Brocade Bags McData For $713M.)

Brocade wanted to expand with further acquisitions, and it saw lossless Ethernet -- also called Converged Enhanced Ethernet (CEE), an Ethernet flavor tailored for the data center -- as a necessary investment.

"We recognized this change would be coming, so in 2006, we took a team, set them aside, and started developing our own ASICs around Lossless Ethernet," Grewal said.

Lossless Ethernet won't be a real market until at least 2010, though. Brocade wanted more -- more than what would become a four-year wait, and more than the "low teens" growth that McData would provide, Grewal said.

That led Brocade to start considering the broader Ethernet market. Getting into "regular" Ethernet would put Brocade on both sides of the server -- the storage side and the network side. It would increase Brocade's market substantially, and to hear Brocade tell it, this was a market crying out for an alternative to Cisco Systems Inc. (Nasdaq: CSCO).

"What we've heard a lot from our customers is that they need a challenger. They need an alternative," Grewal said.

Nearly every Ethernet contender was considered, including startups. (We're guessing Cisco wasn't on the list.) No one was eliminated immediately, but it became clear that a startup would lack the heft needed to make a substantial difference.

As Grewal told Light Reading after his presentation, large enterprises are leery that a small company will vanish or get acquired. That's why they tend to stick with Cisco -- and why they're so anxious for another company to match Cisco's breadth in the data center, he said.

In his presentation, Grewel also noted that Brocade wanted an acquisition that had consistent revenues, nothing "spiky."

Grewal's presentation didn't cover which companies were even willing to sell, but Foundry began to stand out in Brocade's research. A brand-name study by Brocade pegged Foundry as the No. 3 player in terms of customer perceptions, behind Cisco and Juniper Networks Inc. (NYSE: JNPR), of course. "The fourth place challenger, if you will, was more than 2x behind Foundry," said Tom Buiocci, Brocade's vice president of marketing.

But at the same time, Foundry arguably needed some help. People's bosses didn't recognize the name as they do Cisco's or Juniper's, Buiocci said. Foundry customers seemed happy, but the rest seemed indifferent to even trying Foundry's products.

"It's like every time I try to get my kids to try new food," Buiocci said. "Foundry, we believe, is a classic underrepresented brand."

Brocade now believes it's become the second most popular vendor of choice for next-generation data center Ethernet, behind Cisco. (See Brocade Grabs for Silver.) And unless Juniper regains that spot, Brocade doesn't expect to see much competition, because storage connectivity comes with requirements that most other Ethernet players can't serve and "won't be able to learn quickly," Grewal said.

Regarding competition against Cisco, Grewal pointed out -- as many analysts have -- that Cisco's business is threatening to overlap that of its partners, including EMC Corp. (NYSE: EMC), HP Inc. (NYSE: HPQ), and IBM Corp. (NYSE: IBM).

"We have built a history of working with them on their individual strategies. We don't compete with them," Grewal said. "There's lots of rumors about markets [Cisco] will be getting into next year which are competitive" with EMC and company.

— Craig Matsumoto, West Coast Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:31:34 PM
re: Brocade/Foundry Readies Ethernet Invasion What do you guys think Brocade should do with Foundry's carrier business?

It sounds like they don't have some secret, massive, master plan for melding the carrier stuff with legacy Brocade to make some kind of -- well, I don't know what it would have been, but it's apparently not happening!

Sounds like they'll just let the carrier business carry on, which is fine but not as exciting. Anyone got a grander suggestion?
Silence Dogood 12/5/2012 | 3:31:32 PM
re: Brocade/Foundry Readies Ethernet Invasion Brocade has bit off a big acquisition and if they are not careful they will choke on it. FDRY is not known for fine tuned operational processes or systems so integrating the company will be challenging. Further, the enterprise business is a completely different beast than the carrier business so they have a decision to make. They can leave it along and hope it plods along, sell it or shit it down. Leaving it along with consign it to the dead pile so it's really not an option.

I'd say sell it off and focus 100% of the company on the enterprise and the challenges/opportunity they have in data center consolidation. Otherwie they risk diffusion of resources across multiple customer segments and not having a complete product solution in any one segment.

Pete Baldwin 12/5/2012 | 3:31:30 PM
re: Brocade/Foundry Readies Ethernet Invasion Adding to Iipoed's comment, I'm hoping there's at least one key typo in dogood's post. :)

Not sure I can agree with you either, DoGood... it does seem true Brocade has no grand plans for the carrier side of Foundry, but I can't help thinking that eventually, Brocade is going to need that "in" with the carriers. Sure, Foundry doesn't rule the carrier roost yet, but it's a head start for Brocade.
Iipoed 12/5/2012 | 3:31:30 PM
re: Brocade/Foundry Readies Ethernet Invasion dogood: might want to reread your response prior to posting. I know there is a point being made in your post but have no idea what it is. Do you really understand the real benefits of this acquisition? why it is good for both? brcd and fdry are much better off together especially when competing with C.
Pete Baldwin 12/5/2012 | 3:31:29 PM
re: Brocade/Foundry Readies Ethernet Invasion btw, Iipoed.... not that you have to, but: I'm surprised you didn't chime in on the bobby johnson story.

Iipoed 12/5/2012 | 3:31:27 PM
re: Brocade/Foundry Readies Ethernet Invasion wouldn't most of us wish we could of or have accomplished what BJ has done in his career? I owe the guy a heck of a lot. And respect his vision and work ethic.
wonder what his next move will be. Maybe I will come out of retirement.
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