Brocade to pay $3B to buy Foundry Networks

By JORDAN ROBERTSON, AP Technology Writer Mon Jul 21, 7:50 PM ET

SAN FRANCISCO - Brocade Communications Systems Inc. is plunking down $3 billion for Foundry Networks Inc., melding two companies with presence deep in the data center and posing a direct challenge to industry behemoth Cisco Systems Inc.

The deal announced Monday represents an attempt by San Jose-based Brocade to expand beyond data storage equipment and begin selling machines used to shuttle Internet traffic, Cisco's home turf.

Brocade dominates the market for a type of switch that connects servers to data storage machines, but it's under pressure.

Cisco is a small player in that area, but has long been the leading provider of routers and switches that direct Internet traffic. That industry has become increasingly attractive as Internet traffic, particularly bandwidth-hogging video, has exploded, and companies and Internet service providers have to spend mightily to upgrade their networks.

Foundry is a smaller competitor to Cisco in that area.

The acquisition promises to make Brocade a more well-rounded competitor to Cisco, but isn't likely to substantially dent Cisco's dominance because Foundry Networks is considered a niche player, albeit at the high end of the market, which means the company can command higher prices and healthy profit margins.

Despite its smaller size — Foundry had $607 million in sales last year, compared with Cisco's $29 billion — Foundry is known for its innovative technologies and has a loyal base of customers in the government, health care and financial services industries.

Foundry Networks owned just 2 percent of the market for Ethernet switches last year, while Cisco commanded 71 percent, a huge lead in supplying primarily large corporations with gear that makes up a big part of their underlying networking infrastructure, according to data from the Dell'Oro Group research firm.

Alan Weckel, a senior analyst with Dell'Oro, said competitive pressures probably drove Brocade into pursuing Foundry Networks, since Cisco is pushing a convergence of technologies that threatened Brocade's business.

Brocade specializes in switches that use so-called Fibre Channel technology.

As servers become more powerful, and information technology managers demand more control over increasingly complicated machinery, Cisco has been advocating that the Fibre Channel and Ethernet technologies themselves should be merged somewhat — a direct assault on the core business of Brocade and Foundry Networks, Weckel said.

"Enterprises are really looking to reduce the complexity, especially at the high end of the data centers out there," he said. "So a deal like this was bound to happen. It's just a matter of who and when."

The purchase price Brocade agreed to pay works out to $19.25 per share, a 41 percent premium to Foundry Networks' closing stock price Monday before the deal was announced.

Brocade currently has about 2,500 employees, and Foundry Networks has about 1,000, according to Tom Buiocchi, vice president of marketing for Brocade.

He declined to discuss whether Brocade anticipated any layoffs, but noted that Brocade's and Foundry Networks' product lines don't overlap, so there would be few obvious areas to cut. He said the deal is supposed to be "additive" to Brocade and isn't about cost-cutting.

The deal is expected to close in the fourth quarter of this year and add to Brocade's profits in 2009.

"Together we're going to be a bigger, stronger company," Buiocchi said in an interview with The Associated Press. "Companies have been asking us for a high-performance, high-reliability alternative (to Cisco). That's one of the reasons behind this transaction."

Shares of Foundry Networks surged $4.44, or 32.5 percent, to $18.10 in after-hours trading after the acquisition was announced. They had closed up 30 cents, or 2.3 percent, at $13.66 during the regular session.

Brocade shares fell $1.38, or 16.6 percent, to $6.95 after-hours. They closed up 6 cents at $8.33 during regular trading hours.