Brocade-Foundry Networks Buyout Challenges Cisco

Brocade Communications Systems took a major step toward leveling the networking playing field against market superpower Cisco Systems July 21 by acquiring Internet router and switch maker Foundry Networks for about $3 billion in cash.

Many enterprises need to bolster their infrastructures to support the growing prevalence of Web-based and mobile applications, and this merger will provide a new alternative for CTOs/CIOs to consider. As recent failures of high-pofile Web-based infrastructures have shown--namely, outages at Amazon s3, Salesforce.com, Google and others--the importance of robust, up-to-date systems that can handle high volumes of transactions cannot be overvalued.

Under the agreement, Brocade will pay a combination of $18.50 cash plus 0.0907 shares of Brocade common stock in exchange for each share of Foundry common stock, representing a total value of $19.25 per share, based on Brocade's closing stock price on July 18 of $8.27. The acquisition is expected to close in the fourth quarter.

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The merger of Brocade, which is among the world market leaders in storage networking infrastructure, and Foundry brings together two veteran, consistently profitable companies. Both have longtime loyal customers, mostly in the high-end enterprise data center market.

Foundry is known for its innovation. It has a substantial base of customers in the government, health care and financial services vertical market segments.

Brocade ($3.09 billion market capitalization) and Foundry ($1.99 billion) combine to make a $5 billion company, but that still pales in comparison with the size of world networking market leader Cisco Systems, which has a market capitalization of $129 billion. Nonetheless, the combined company could still prove to be a worthy adversary in the sales wars.

Brocade has a long and profitable relationship with Hewlett-Packard, which resells its hardware infrastructure in most of its data center and storage transactions. Foundry has been a dyed-in-the-wool HP competitor for years, but Foundry CEO Bobby Johnson Jr. told a conference call of analysts and journalists that "everything will be changing now. The Foundry product lines will live on under the Brocade brand."

Johnson also said his new role in the company will be determined over the next few months as the two companies aggregate their resources. Brocade CEO Michael Klayko will continue in his present position.

"Through this deal, Brocade has now uniquely positioned itself in the networking industry to deliver a leading alternative solutions portfolio spanning local, metro, wide and storage area networks," said Zeus Kerravala, senior vice president of Global Enterprise Research at the Yankee Group.

"The breadth and depth of this portfolio make Brocade a viable option for customers looking for complete networking solutions capable of addressing their constantly evolving and increasingly complex IT challenges," Kerravala said.