Canaccord betting Dell will buy Brocade

An analyst at global capital markets firm Canaccord Genuity Inc. is predicting that Dell Computer Corp. will buy its way into the networking marketing, and that the smart money is on Brocade Communications Systems Inc.

Paul Mansky wrote in a flash report on Thursday that Dell is moving away from its legacy PC business and looking for future growth in the enterprise market, and “the full IT ‘stack’ of yesteryear” is key to that growth.

“With the acquisitions of EqualLogic, Perot and Compellent (among others), Dell now has a beach head (sic) in three of the four primary layers of this stack — storage, servers and services,” he wrote. “Networking is the one crucial piece that’s missing.”
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Without the technology to create a virtual and vertical stack, Dell risks hopping from one commoditized business to another, Mansky wrote.

The research note points to three items that suggest a move is imminent: the accelerating decline of PC sales as tablets take over the market; the success Dell has seen cross-selling Ethernet switching with servers and storage; and the company’s $7 billion in cash on hand. Mansky speculates Brocade could cost as much as $5.5 billion in total considerations.

Why Brocade? First of all, Mansky writes, other alternatives aren’t appropriate. And Brocade owns the Fibre Channel market, with 70 per cent share.

Mark Tauschek, research director with Info-Tech Research Group Ltd. in London, Ont., agrees that Brocade would be “the likeliest candidate” — if, in fact, Dell wants to spend the money. Juniper Networks Inc. would be much more expensive (it has a market capitalization of about $17.9 billion), and is primarily in the carrier market. Extreme Networks Inc., while much smaller with a market cap of under $300 million, is entirely focused on the enterprise and doesn’t have a storage networking play, Tauschek said.

With Hewlett-Packard Co. and Cisco Systems Inc. “eating (Dell’s) lunch,” Tauschek said, “I get the feeling Dell’s starting to feel left out.”

But while a deal might make sense from Dell’s perspective, Yankee Group senior vice-president Zeus Kerravala doesn’t see anything in it for Brocade.

“I just don’t think it makes sense for Brocade to sell right now,” Kerravala said.

There’s a “big inflection point” in Brocade’s near future, Kerravala said, as the leading Fibre Channel vendor (and the only one shipping 16G Fibre Channel) as the market begins to transition to virtualized data centres.

“They are out front in that market,” he said.

Brocade has also beefed up its direct sales force.

There’s also the risk that a Dell-owned Brocade might lose OEM customers like IBM Corp., EMC Corp. or HP, Kerravala said.

“Dell clearly wants to get into the network,” he said, and has been ramping up its network team. But for a Brocade purchase, “they’re going to have to overpay big time.”
Dell did not respond to a request for comment on the report. Brocade spokeswoman Katie Bromley replied, “We do not comment on rumours.”

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