Dell needs to add networking to its data center IT stack, and Brocade would make the most sense, according to Canaccord analyst Paul Mansky.
Dell, which
has aggressively bought companies to expand its industry reach beyond PCs and
servers, could be in the market for a networking vendor, and the likely target
would be Brocade, according to an analyst.
In a June 1 research note, Paul Mansky, an analyst with
Canaccord Genuity, noted that Dell (NASDAQ: DELL) over the past couple of years
has been building out its IT capabilities-through such acquisitions as Perot
Systems, Compellent and EqualLogic-and expanding its reach into such areas as
storage and services. The moves have given Dell capabilities in three of the
four key data center areas: servers, storage and services.
The one
missing piece is networking, which Mansky called a crucial element in the IT
stack.
"To be clear,
Dell has some limited networking technology in-house (vanilla Ethernet
switching) and has access to more advanced solutions from both Brocade and
Juniper via an OEM relationship," he said in his note. "However, given
networking will most likely be among the most critical sources of intelligence
helping to reshape the horizontal/physical layers into a virtual/vertical
stack, not owning this technology puts Dell at risk of simply hopping from one
commoditized business into another."
The timing
makes sense now, Mansky said. The PC business-Dell's key money generator-is
heading into what he calls an "accelerating secular decline" in both units sold
and average selling prices, thanks in large part to the rise of tablets. In
addition, "Dell has clearly been seeing success cross-selling Ethernet
switching with servers and storage, evidenced by reported results and
qualitative commentary from Dell executives," he said.
Lastly, Dell
has the money for such a deal, with $7 billion in cash on hand.
The PC
business-particularly in the consumer segment-slowed in the first quarter,
according to analysts and vendors. Hewlett-Packard, the world's top PC vendor, saw
consumer PC revenue fall 23 percent in the quarter over the same period last
year. Dell's consumer PC revenue dropped 7
percent, though it was able to weather the blow better than HP because of its
strength in the commercial market.
The worldwide
PC market shrunk 3.2 percent in the quarter, according to market research firm
IDC. Analysts see a number of reasons for the softness in the market, including
the growing popularity of tablets, continued economic uncertainty, and a lull
after the rush last year to buy PCs after Microsoft launched Windows 7.
Dell saw
strength in its data center businesses in the first quarter. Enterprise
solutions and services revenue grew 5 percent to $4.4 billion, to now account
for 30 percent of all Dell revenue. Revenue in servers and storage jumped 11
percent, and services jumped 5 percent, to $2 billion.
Networking is
the next natural step for Dell, and Brocade (NASDAQ: BRCD) makes the most
sense, Mansky said. Canaccord estimates that Brocade could be had for about
$5.5 billion, and fits best into Dell's overall business, he said. Juniper
Networks gets 80 percent of its business from service providers, which is not
Dell's forte, and both Extreme Networks and Force10 don't have enough market
share, according to Mansky.
Brocade's
Fibre Channel strength also makes it an attractive company for Dell. Brocade
has about 70 percent market share, and support for Fibre Channel is important
when talking about converged data center IT stacks. The business also should
continue to generate money for at least the next five years, he said.
"Fibre Channel
is high ROI, legacy Ethernet is low investment and converged products (recently
introduced) are the growth engine," Mansky wrote.
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