SAN JOSE, Calif. The proposed $3 billion merger between Brocade and Foundry Networks highlights the trend of business networks trying to consolidate the number of suppliers and technologies they use, increasingly focusing on Ethernet. Specifically, the merger underscores the significance of a broad industry push to merge traffic from Fiber Channel storage networks with mainstream Ethernet nets.
Companies including Cisco Systems, IBM Corp. and others have been driving standards for Fibre Channel over Ethernet. The first pre-standard products for FCoE emerged earlier this year and included some of Brocade's first adapter cards for servers.
Brocade is a leader in Fibre Channel switches for storage nets with 2,400 employees and annual revenues in its last fiscal year of $1.2 billion. Foundry Networks is focused on Ethernet switching with about 1,100 employees and annual revenues in 2007 of $607 million.
"This merger positions the two companies well in a market that is shifting long term to fewer native Fibre Channel ports and more Ethernet ports," said Bob Wheeler, a senior analyst with The Linley Group (Mountain View, Calif.). "The whole FCoE play is a big factor here," he added.
"Ethernet seems to be the fabric of choice for the data center so Fibre Channel vendors like Brocade really need to offer it," said Alan Weckel an analyst with the Dell'Oro group (Redwood City, Calif.). "It makes sense for Brocade rather than doing that development internally to acquire someone with strong roots in the area," he said.
Foundry representatives echoed those ideas in more generic terms referring to the trend toward converged networks.
"We believe the industry is at an inflection point in the way enterprise and service provider networks and data centers are being architected," said Mike Klayko, chief executive of Brocade in a prepared statement. "Customers are demanding networking solutions that meet the needs for today and can address the many advances in network convergence that are still ahead."
Brocade said the acquisition will position the company as a leading provider to businesses and service providers. However analysts agreed the companies have little presence with service providers today.
"This is really a data center story," said Wheeler.
The merger "is part of an inevitable consolidation in the data center," said Loring Wirbel who heads the EETimes Market Intelligence Unit. Foundry has generally taken a back seat in Ethernet markets to Redback/Ericsson in edge routing and Extreme and Force10 in 10 Gbit Ethernet switching, he added.
Impact of the deal on semiconductor suppliers could be minor due to the fact that ASICs represent most of the major silicon used by the two companies, Wheeler said. LSI Corp. is one of the companies' major ASIC vendors.
In a conference call announcing the deal late Monday (July 21), executives from the companies said they expect to see the merger raise their aggregate revenues about five percent a year in 2009. The two companies expect to reduce production costs as much as $33 million a year starting in 2010 due to greater efficiencies and economies of scale.
Executives said the merged company could also see minor cost savings of up to $12 million a year starting in 2010 from other cost synergies. However, executives said they saw no overlap in its R&D or sales and marketing operations and would not comment on possible layoffs until September.
The deal is expected to close in the fourth quarter of 2008.