In an upcoming 451 TDM report, we argue that momentum behind SAN and IP networking convergence could fuel M&A in the fiber channel over Ethernet (FCoE) space. It all started in August 2002, when Cisco Systems (NASDAQ:CSCO) paid $750m for Andiamo Systems. Reinforcing that acquisition, the vendor acted again four years later, buying Nuova Systems – the company that was largely responsible for developing the FCoE protocol – for $50m. Not to be outdone, primary players in the FCoE market responded. Brocade (NASDAQ:BRCD) shelled out $2.6bn for Foundry Networks in July 2008, and Emulex (NYSE:ELX) picked up ServerEngines for $159m last month.
Brocade is currently the FCoE market share leader, holding an estimated 70.1% of the market at the start of 2010, compared to 66.8% at the beginning of 2009. However, the tide appears to be turning in the SAN switch space. According to Cisco’s latest third-quarter fiscal year 2010 earnings report (for the period ending May 1, 2010), its SAN business (switches and directors) grew 100% to $140m from $70m a year ago. The vendor’s Nexus product line has seen particularly stellar growth. Cisco’s top-of-rack Nexus 5000 has seen its sales grow 425% year-over-year and is at a current run rate of $250m per year. Further, Cisco’s Nexus 7000 core switch, which typically aggregates network traffic from rack-mounted switches, has also exhibited rapid growth to the tune of 281%.
The emergence of pre-integrated stacks of consolidated server, networking and storage hardware could spur other major players to make moves as well. Hewlett-Packard (NYSE:HPQ), IBM, Oracle (NYSE:ORCL) and Dell (NASDAQ:DELL) can now infuse new technologies and management tools into their offerings. As such, firms such as Akorri, Virtual Instruments and Aptare that can locate storage bottlenecks within SAN environments could become potential targets for these larger companies. There have already been a handful of storage management transactions over the last few years, including NetApp’s (NASDAQ:NTAP) purchase of Onaro in January 2008, EMC’s takeout of WysDM Software in April 2008 and SolarWinds’ (NYSE:SWI) pickup of Tek-Tools in January.