Brocade Gets FTC's Blessing

Now that the Federal Trade Commission (FTC) has offered its approval, the Brocade-McData deal could be days away from becoming reality. (See FTC Approves Deal and Brocade Bags McData For $713M.)

Brocade said Tuesday night the FTC has closed its antitrust review of the $713 million deal, and the waiting period under the Hart-Scott-Rodino Antitrust Act has expired. (See Brocade-McData Draws Extra Scrutiny.) Shareholders from both SAN switch vendors will vote on the deal Thursday, and Brocade expects the deal to close Monday if shareholders approve.

The FTC's blessing was considered the biggest obstacle. The FTC took longer than usual to sign off on the deal because FTC lawyers -- and perhaps some of its five commissioners -- favored blocking the deal. But industry sources say the FTC commissioners were convinced they did not have sufficient opposition from customers or shareholders to block the deal.

In a Byte and Switch poll, 82 percent of the 200-plus respondents said the FTC should approve the deal because of sufficient remaining competition from Cisco and QLogic. Industry sources estimate Brocade's market share would be between 60 percent and 70 percent in directors and from 75 percent to 80 percent in fabric switches after the merger.

Investors reacted positively to the FTC's decision this morning. Brocade's stock price rose from $8.58 to $8.77 by mid-day, and McData's shares went from $6.33 to $6.55."We view this as a positive for Brocade, as it removes some of the uncertainty surrounding the pending transaction," financial analyst Mark Kelleher of Canaccord Adams wrote in a note to clients. "It should also allow Brocade to provide more specifics regarding its strategy for integrating McData during Brocade's January earnings call in mid-February."

Much of that integration will center on staff reductions. Brocade had about 1,400 employees and McData around 1,000 when the deal was announced last year. Analysts expect hundreds of layoffs as Brocade tries to make good on its claims of saving $100 million a year in "cost synergies."

"We believe Brocade will look to shut the majority of McData operations, as there is significant product overlap between the two companies," Kelleher wrote. "The key asset for Brocade, we believe, is McData's installed base, and the removal of a significant price-competitor."

Several sources with ties to McData say more than 100 workers have been notified Friday would be their last day, although a McData spokeswoman says there have been no layoffs yet. "There have been no workforce reductions," McData PR director Jil Backstrom says. "We cannot comment on how many positions may or may not be eliminated, nor can we comment on the timing."

Dave Raffo, News Editor, Byte and Switch