Brocade Bags McData For $713M

The long predicted merger of leading switch vendors Brocade and McData finally came to pass today with Brocade's plan to acquire its rival for $713 million. (See Brocade Buys McData.)

Financial analysts began chattering about such a union ever since Cisco entered the Fibre Channel switch market less than four years ago. (See Cisco Gets Set.) And in fact, Cisco has made gains in the past few years, especially in the FC director space and mostly at McData's expense. (See Cisco Storage Rebounds.) Preliminary earnings reports for the last quarter issued by both companies today underscore this point: Brocade continued its recent success while McData stumbled again.

And apparently, the two storage vendors have flirted with each other in recent years, but they couldn't get the timing right. A source close to both companies says Brocade approached McData several times but was rebuffed. McData also initiated such discussions at times that Brocade was not interested.

This time, Brocade CEO Mike Klayko approached McData CEO John Kelley, and Kelley agreed to sell.

"We've had this conversation for awhile," Klayko said about acquisition talks today on a call with investors. "A couple of months ago I picked up the phone and called John. The last couple of months we chatted. The last couple of weeks it went very, very fast."Klayko said there were no other bidders for McData.

Today's earnings disclosures gave a good indication of why the deal was made now. Brocade said it expects to report revenue of $188 million to $189 million, better than previous guidance of $174 million to $183 million, and up 54 percent from last year.

McData said it would report revenue of $150 million to $152 million, compared to previous guidance of $170 million to $180 million.

Brocade got the jump on McData and Cisco over the past year by becoming the first to market with 4-Gbit/s gear. McData has stumbled after, taking longer than expected to integrate products from its acquisitions of Nishan and Sanera, and problems getting its flagship i10K director qualified from its largest OEM customer, EMC. (See Qualified Response.)

Despite its financial success, Brocade has had its share of troubles in the past few years. Former CEO Greg Reyes and other executives were charged last year with improperly accounting for backdated stock options. (See Reyes Charged With Fraud.) Reyes, free on $2 million bail, stepped down in January of 2005 when Klayko took over. (See Big Bond for Reyes.)After the close of this latest deal, McData will become a subsidiary of Brocade. Klayko gave few product details on the call, leaving open the question of whether Brocade will continue to sell McData switches and directors.

Brocade's management team will continue in their current roles after the close, with Kelley serving as an adviser.

The deal leaves Brocade and Cisco as the only major Fibre Channel switch vendors, although HBA vendor QLogic has been making inroads in switches the past year. McData acquired another rival, CNT, last year for $235 million. (See McData Bags CNT for $235M.) McData previously bought smaller rivals Nishan and Sanera, while Broacade acquired Rhapsody. (See Brocade Scoops Up Rhapsody.)

Terms of the stock transaction call for McData stockholders to receive 0.75 shares of Brocade common stock for each share of McData common stock. That comes to about $4.61 per McData share or $713 million based on Brocade's Monday closing price of $6.14. McData stock closed at $3.11 Monday. McData stockholders will own about 30 percent of Brocade.

Dave Raffo, News Editor, Byte and Switch