Nortel on Feb. 13 spun out its blade server switch business unit in a deal with private equity company Garnett & Helfrich Capital.
The Menlo Park venture fund, which specializes in venture buyouts, gained a controlling interest in the venture, renamed Blade Network Technologies.
Garnett & Helfrich has struck similar deals with Computer Associates International for its open-source Ingres relational database business and Wyse Technology for its thin client business.
With the new Blade Network Technologies, the venture company intends to devote the resources necessary to grow the blade server switch business fivefold to tenfold over the next four to six years, according to David Helfrich, managing director of Garnett & Helfrich Capital and chairman of the board for the newly formed venture.
This latest buyout is part of a larger trend among private equity investors to take business units private that had been acquired by larger companies.
The rationale is that not all mergers or acquisitions are winners, and some businesses require more resources and attention than larger companies can provide, according to Helfrich in Menlo Park, Calif.
"There is more activity around the technology buyout, but whats driving our activity is very different than a SilverLake or the parties that did the Network General spinout," Helfrich said.
"They tend to focus on a larger buyout. Our focus is between $50 and $200 million in revenue spinouts. We tend to focus on large public companies and spinning out product lines from those large companies," he said.
Nortel, which started the business unit four years ago under the direction of Vikram Mehta, chose to spin out the unit because it is not considered strategic to Nortels core business, according to Nortel president and CEO Mike Zafirovski.
Mehta, which Garnett & Helfrich hired away from Nortel last summer, is president and CEO of the new company.
The market for blade server switches to date represents roughly $200 million in revenue, out of a total blade server market of $2 billion, according to IDC.
"We are about 30 percent of the market [for blade server switches], making us one of the largest [vendors in the space]," Mehta said.
IDC forecasts that the total market by 2009 will be $10 billion, with switches making up between $1 and $2 billion.
"Our goal is to have between 20 to 30 percent of that market. Its a significant opportunity," said Mehta in Santa Clara, the headquarters for the new firm.
Nortel brought to the table its intellectual property along with its customer contracts—including IBM and HP. It has an installed base of 52,000 switches with roughly 1.1 million Gigabit Ethernet ports in use. Blade Network Technologies competes primarily with Cisco Systems.
Helfrich believes the new company can compete effectively against large competitors such as Cisco because of its focus. "We want to be one of the best partners for IBM and HP and eliminate channel conflict, avoiding problems with stand-alone product cannibalization and making sure 100 percent of our resources are directed to the support of IBM, HP and other blade center partners.
This is a very different model than Cisco or other networking companies that take their product to the customer through a channel," he said.
"The business model associated with what we do with blade network technologies has to be very closely aligned with how server vendors operate, how they get products and how those products are supported. That is very different to how networking vendors operate," added Mehta.
"IBM and HP see lot of value in a company single mindedly focused on the blade market to provide superior solutions to blade server systems," he added.
The new company will compete aggressively with competitors such as Cisco through "innovative hardware designs" and in value-added software for the switches—the spinouts "secret sauce", Mehta said.
"We have exceptional deep packet inspection; we can set up filters to prevent against code red or denial-of-service attacks. Were providing a secure switch thats very content- and application-aware and has the ability to parse packets as they come into the blade center and make sure its not somebody trying to break into a system," he said.
Blade Network Technologies also has a fully owned subsidiary, Blade Network Research, which provides hardware design for the company.
It will tap the "rich" engineering talent pool for hardware design in the Ottawa, Ontario area, Mehta said.