Signs Point to Dell Acquiring Brocade - What It Might Mean for Competitors

by: Frank Berry

It: Dell Acquires Brocade

Paul Mansky of Canaccord Adams published a Flash Report (.pdf) on Wednesday titled, "Dell Looks Poised for a Networking Move." In the report, Mr. Mansky establishes the motive for Dell (NASDAQ:DELL) acquiring a networking vendor when he says,

With the acquisitions of EqualLogic, Perot and Compellent (among others), Dell now has a beach head in three of the four primary layers of this stack – storage, servers and services. Networking is the one crucial piece that is missing.

Mr. Mansky then singles out Brocade (NASDAQ:BRCD) as the target.

We view Brocade as the most likely target for myriad reasons. First is the absence of alternatives. Juniper is 80 percent service provider – not Dell's business – and Extreme and Force10 carry insignificant share. Second, Brocade's Fibre Channel (FC) business should be an attractive cash engine for at least five years.

After talking to various people in the industry, my casual interest in the speculation in this report turned into a firm belief that it's happening now. The Dell Storage Forum is going on next week in Orlando. This end-user forum would be a perfect venue to announce the acquisition.

If it happens, a Dell acquisition of Brocade will ripple through Brocade customers and competitors, causing cloud stack providers to catch a little acquisition fever. Here's how I see this deal affecting other companies:

  • Broadcom (BRCM) - Motivates them to make another run at Emulex before someone else does. Broadcom would get their LOM and converged adapter design wins, as well as a profitable Fibre Channel adapter business, all for under $1B.
  • Cisco (NASDAQ:CSCO) - No affect.
  • Emulex (NYSE:ELX) - Emerges as a prime target for Broadcom, HP, IBM and LSI.
  • HP (NYSE:HPQ) - Creates a sense of urgency to lock-up Emulex for the chip and adapter technology they have designed into their servers for the next several years, then the Fibre Channel, FCoE and InfiniBand switch business of QLogic to round out their switch portfolio.
  • LSI-OLD - Since they already fab Emulex chips, now is the time to re-enter the network LOM and adapter market by acquiring Emulex. This would give LSI a competitive, low cost portfolio to compete with Broadcom and Intel (NASDAQ:INTC).
  • IBM - They started an Ethernet switch portfolio through their acquisition of BLADE. Knowing that HP and others have an eye on Emulex and QLogic, they could move to add Emulex LOM and adapter technology, then the Fibre Channel, FCoE and InfiniBand switch business of QLogic to round out their switch portfolio.
  • Mellanox (NASDAQ:MLNX) - With Brocade off the table for HP and IBM, the rich Mellanox portfolio of networking chips, adapters and switches, is now worth more than it was when Oracle made recent investment in the company.
  • Oracle (NASDAQ:ORCL) - I think they want a full cloud stack, so they’re going to exercise whatever options they have related to their investment in Mellanox.
  • QLogic (NASDAQ:QLGC) - There is a God. HP, IBM and Oracle will run away from Dell/Brocade to their new growth engine...switches.

My hat is off to Dell. Brocade has by far the broadest portfolio of leading-edge products, making it the jewel among independent, pure-play, data center networking vendors. The addition of the Brocade product line does more than fill a piece of the puzzle. This acquisition immediately propels Dell into the leadership tier of cloud stack and enterprise networking providers.

The bottom line is this: Signs point to Brocade being acquired. Emulex and QLogic are now in play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.