Why Dell (Maybe) Likes Brocade
The catalyst was a research note by analyst Paul Mansky of Canaccord Adams Inc. He pointed out that Dell Technologies (Nasdaq: DELL)'s recent acquisitions have brought expertise in storage, server and services. The missing piece of the data center would be networking. Brocade Communications Systems Inc. (Nasdaq: BRCD) represents a strong target with a broad customer base, and it's more acquirable (and less service-provider-intensive) than Juniper Networks Inc. (NYSE: JNPR). (Dell acquiring Cisco Systems Inc. (Nasdaq: CSCO) was, uh, not considered.)
Manksy does have some evidence that Dell is thinking along those lines. The company filed a US$3.5 billion shelf registration on Wednesday, giving it the option to raise that amount in debt, should executives wanted to do something like acquire a company.
That $3.5 billion was enough to acquire Brocade, but Brocade's stock rose 44 cents (6.6%) to $7.11 Thursday, for a market capitalization of $3.36 billion, and it was up a few more ticks after-hours. Dell certainly has the cash to cover a premium, but its financial team, if they're working on a Brocade deal, probably have some recalculating to do.
Dell shares were essentially unaffected Thursday: up 17 cents (1.1%) at $15.77.
Again, this is less a rumor and more of a market-created theory. It's not a bad one, though. As blogger Frank Berry of Network Computing noted Thursday, Cisco kind of started this by turning the data center into an architecture -- meaning, loosely put, that servers and networking all became one big product. (Network Computing, like Light Reading, is owned by UBM TechWeb.) (See Cisco Dreams of Data Center Unity.)
IDC says Cisco has a 10.5 percent share of the blade server market, and Cisco talks about having 5,400 customers for its Universal Computing System, with revenues of about $225 million last quarter. That's not huge, but it's a significant jump considering Cisco started 2009 with a share of zero.
So, Dell might want a way to deflect Cisco's rise in blade servers, while Brocade could always use new ways to battle Cisco's hegemony in switches, especially at a time when Cisco looks vulnerable. (See Cisco Feels Switching Pains.)
— Craig Matsumoto, West Coast Editor, Light Reading