Brocade agrees to acquire Foundry in US$3 billion deal

Storage networking company Brocade Communications Systems (NASDAQ: BRCD) has agreed to acquire enterprise LAN vendor Foundry Networks (NASDAQ: FDRY) for approximately US$3 billion, the companies announced Monday.

Brocade said the deal will make it a top provider of networking gear for enterprises and service providers, by allowing it to offer a full line of products that extends from the Internet to wide- and local-area networks and into the data centre.

The deal has been approved by the boards of both companies and is expected to close in the fourth quarter, pending approval by Foundry’s stockholders and other closing conditions, Brocade said.

Brocade will pay US$18.50 in cash plus about one-tenth of a share of Brocade stock for each share of Foundry, for a total of US$19.25 per share. Brocade expects to fund the deal with cash from both companies and US$1.5 billion of debt financing.

Data centres and enterprise LANs, which typically are built with different network technologies, are widely expected to converge on Ethernet with a still-emerging standard called Fibre Channel over Ethernet (FCoE). Foundry is one of a handful of longtime Ethernet LAN vendors that have lived in the shadow of Cisco Systems.

“Our business models and technologies are extremely synergistic,” Marty Lans, Brocade senior director of product management for data center infrastructure, said in an interview. Foundry has “the best technology and the broadest set of features,” he said.

The companies do not expect to make layoffs following the deal, he said.

Foundry was founded in 1996 and has about 1,100 employees. It posted its preliminary second-quarter financial results Monday. Revenue was US$160.7 million, up from US$143.2 million in the same quarter last year. Net income was US$18.3 million, up from US$15.6 million.

The combined company will be led by Brocade CEO Michael Klayko and will use only the Brocade brand, although product names from Foundry will remain, executives said on a conference call following the announcement. The companies haven’t defined a role for Bobby Johnson, Foundry’s founder, president and CEO, but said the 30-year networking veteran would stay on board.

“I’m committed to making this happen, and I’m committed to helping Mike and both teams,” Johnson said.

Brocade executives contrasted the Foundry deal with Brocade’s 2006 acquisition of McData, where there were many overlapping products and a key driver of the deal was cost savings. They expect this buyout to boost revenue and increase Brocade’s earnings beginning in its 2009 fiscal year, which will end in October 2009.

Customers want to address the challenges of rapid data growth with reliable and integrated systems that reduce complexity, Klayko said.

“The networks of today, from the Internet, to corporate LANs, to mission-critical data centres, are undergoing dramatic, dynamic change and architectural reconsideration,” he said.

The combined company will be the only “alternative” with reach all the way from the Internet to data centres, he said. Cisco, the dominant LAN and WAN vendor, has that reach today and is a growing force in data centers, according to Greg Schulz, an analyst at StorageIO.

Cisco Systems and Brocade are approaching convergence of LANs and data-centre networks from opposite directions, and Brocade needs to bulk up for the fight, Schulz said. The confrontation goes all the way into technology itself, with each company backing a different interim technology on the way to FCoE, which is expected to eventually become the industry standard, he said.

“It’s very much in the trash-talking, pre-fight runup,” Schulz said.

However, the Foundry deal won’t affect the timeline for Foundry’s delivery of next-generation products, including FCoE products, Brocade said. Those products are independent of what Foundry brings to the table, but the deal expands Brocade’s scope, they said.

Brocade brings a higher profile outside the U.S., while Foundry has a strong position in federal government accounts, the companies said. Brocade will continue to sell primarily through OEMs (original equipment manufacturers), while Foundry uses direct sales and channel partners. In at least one case, that could be awkward: Hewlett-Packard is a Brocade OEM and a LAN competitor to Foundry. The executives said discussions have taken place with HP.

As a possible sign of how much it needs Foundry, Brocade’s offer of US$19.25 per share is a significant premium for the company. Foundry shares on the Nasdaq closed Monday, before the announcement, at US$13.66. Late Monday, those shares had risen in after-hours trading to more than US$18. Brocade had fallen after hours to US$7.09 from US$8.33 at market close.

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