Investors React to McData-CNT Chatter

Talk of acquisition has sharp effect on stock prices, but insiders doubt it's true

January 15, 2005

2 Min Read
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Day-long rumors that McData Corp. (Nasdaq: MCDTA) will buy switch rival Computer Network Technology Corp. (CNT) (Nasdaq: CMNT) had significant effect on both companies stock prices, but industry analysts doubt any deal will happen soon.

CNT’s stock shot up more than 15 percent today to $6.62 by 4 p.m. EST, while McData’s continued a recent trend down, dropping more than 11 percent to $4.25. The rumor began last night, fueled by rampant speculation in the industry that there will be consolidation of switch vendors (see RBC Poll Forsees More M&A). Brocade Communications Systems Inc. (Nasdaq: BRCD), Cisco Systems Inc. (Nasdaq: CSCO), and McData are the big three -- with CNT a distant and struggling fourth.

Neither McData nor CNT would comment on the rumors, which did nothing to quiet them. Financial analysts say there have been no signs of a McData-CNT deal in recent days, though.

“We don’t believe it,” says analyst Steve Berg of Punk Ziegel & Co.

“Our source tells us that McData’s management hasn’t even spoken with their banker [Credit Suisse First Boston Corp.] in two weeks. And why was CFO Ernie Sampias at Needham & Co. [Growth Conference] Wednesday if he was negotiating an M&A transaction?”

Another analyst who asks to be unnamed says he doesn’t believe such a deal is in the works -- and it would be a bad idea for both companies.“Two shrinking companies can merge, but that doesn’t mean they would stop shrinking,” the analyst says.

McData is set to announce general availability of its new i10K director next Tuesday, which competes with CNT’s flagship UltraNet Multiservice Director (UMD) as well as products from Brocade and Cisco (see McData's Ready for Rollout). But, although it rallied slightly in the third quarter of 2004, CNT has little significant market share compared to the other three (see CNT Gets UMD Bounce). McData is the market leader in director switches, but its share has been steadily eroded by Brocade and Cisco in the last year (see SAN Switch Year-End Summary and McData Merely Mediocre).

— Dave Raffo, Senior Editor, Byte and Switch

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