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.