QLogic Should Acquire Extreme Networks

by: Frank Berry

The Wall Street Journal wrote on Monday that Brocade (NASDAQ:BRCD) has quietly put itself up for sale. Brocade customers HP (NYSE:HPQ) and Oracle (NASDAQ:ORCL) were mentioned by unidentified WSJ sources as among the potential buyers that are kicking the tires.

Brocade is coveted by its customers because the company is the only networking vendor that has a complete portfolio of Ethernet and Fibre Channel technology that spans adapters and switches. The end-game for HP and Oracle is cloud computing. They know they will need this broad networking capability in the future to compete with Cisco (NASDAQ:CSCO) for delivering compute power, storage capacity and networking bandwidth from the cloud. HP and Oracle also know this range of technology is needed short-term to protect their business from Cisco as servers evolve to fabric-based servers featuring sophisticated, high-powered networks inside.

I consider HP most likely to buy Brocade simply because the companies are so closely aligned. HP is Brocade’s biggest customer and Brocade products are already tightly integrated into HP storage systems and blade servers. The Brocade portfolio would help HP compete better in the networking and server markets today and in the cloud computing market tomorrow.

If HP acquires Brocade, expect the event to ripple through the industry. Other major server vendors will move to counter Cisco and HP by acquiring a similar array of Ethernet and Fibre Channel adapter and switch technology. In this scenario, QLogic (NASDAQ:QLGC) would be at or near the top of the list of acquisition targets, and QLogic shareholder value would soar….if the company has Ethernet switch technology and products to round out its portfolio.

That’s why QLogic should acquire Extreme Networks (NASDAQ:EXTR), an Ethernet switch company with a market cap of about $250 million. The acquisition would give QLogic, a company with over $300 million in cash, an immediate presence in the emerging market for 10Gb Ethernet switches to complement their infant line of Ethernet adapters and wide portfolio of Fibre Channel adapters and switches. Plus, QLogic is one of the few companies with the expertise to merge the technology into an end-to-end line of unified networking products that IBM, Dell or Oracle could use to compete against Cisco and HP.

QLogic CEO H.K. Desai and Extreme CEO Mark Canepa are old friends from the days when Mr. Canepa was general manager of Sun’s storage group. If they aren’t already talking about this merger, it’s time one of them picked-up the phone. Cisco and Brocade have set the pace with networking architectures that consist of highly integrated adapters and switches working together. With Ethernet switch technology and some Ethernet war veterans like Canepa added to the management team, QLogic could become an exciting growth company with the networking portfolio needed by larger cash-rich vendors. Without Ethernet switch technology and the infusion of leadership from the Ethernet market, the company risks living on only so long as the Fibre Channel host bus adapter cash cow can deliver.

Disclosure: No positions.