Dell adds another element to its stack to sweeten its pitch to enterprise customers. But can it compete with Hewlett-Packard or Cisco?
Dell Inc. has announced it has closed a deal to pick up data centre switching specialist Force10 Networks Inc. for an undisclosed sum, news that sent shares of rival network gear company Brocade Communications Systems Inc. down seven per cent.
It’s a good move for Dell [NASDAQ: DELL] as it tries to build an enterprise stack that puts the company in the league of Hewlett-Packard Co. [NYSE:HPQ] or Cisco Systems Inc. [NASDAQ: CSCO], said Derek Silva, research analyst with Info-Tech Research Group Ltd.
“They actually complement each other really well,” Silva said. While Dell’s existing networking products work well at the edge of the network, it doesn’t have a data centre core play. That’s what Force10 gives Dell, Silva said.
“(Force10 doesn’t) have switches that connect your department to the rest of the network,” he said. “There is very little overlap.” And the deal gives Dell “instant market share, however small.”
Force10 had a 0.6 per cent share of the $4.74 billion Ethernet switch market (all figures U.S) in the first quarter, and a 0.4 percent share of the $21-billion market in 2010, according to Dell’Oro Group. It has annual revenues of about $200 million, and while the company operates in 60 countries, 80 per cent of its business is in North America.
The move is no surprise to Zeus Kerravala, vice-president of enterprise research at Yankee Group. There’s been industry rumours for a year that Dell wanted to add networking products to its portfolio – fed, he added, by the fact that the Texas company was hiring staff with networking experience.
“They weren’t hiring all that talent so they could have an OEM (original equipment manufacturer) relationship with Brocade and Juniper and people like that.”
The deal brings Dell into the realm of a Cisco or HP, Silva said, being able to offer networking hardware throughout the enterprise, from the edge to the core. “The Force10 acquisition is really about being able to sell to enterprises,” as well as the small and mid-sized businesses Dell’s current network gear already sells to.
The two companies make a good match, Kerravala agreed. Most of Force 10’s buyers are Web portals and high performance computing buyers, while Dell is in the volume server business. A merger could get them into each other’s markets.
Kerravala also speculates there could be another reason the pair are getting hitched: Both have two big customers with large data centres: Facebook Inc. and online games provider Zygna Inc. If they are concerned about the viability of small Force 10, the merger would keep both buyers happy, Kerravala said.
The deal should also please network managers, he said, for it keeps Force 10 and its products alive. Kerravala believes Dell will use them to go after Cisco customers with sharp pricing. That will put more pressure on Cisco at a time when the company is coming to grips with competition from HP networking products that have eaten into sales.
Brocade [NASDAQ: BRCD], a Dell partner, had been linked to Dell as a possible takeover target earlier this year. The deal is a much better fit than a Brocade acquisition would have been, according to Silva. Brocade’s strength is in storage networking rather than core data centre switching.
Brocade had been suggested as a takeover target for Dell by Canaccord Genuity Inc. analyst Paul Mansky, who said without the final piece in Dell’s vertical stack, the company risked hopping from one commoditized business to another.
“With the acquisitions of EqualLogic, Perot and Compellent (among others), Dell now has a beachhead in three of the four primary layers in this stack – storage, servers and services,” he wrote in a flash report. “Networking is the one crucial piece that’s missing.”
He noted that Brocade owns the Fibre Channel market, with 70 per cent share.
Silva doesn’t think this will be the end of Dell’s partnership with Brocade because of the latter’s strength in storage area networking. It could end up in lower revenues for Brocade – “Investor sentiment has already spoken to that,” Silva said – as Dell currently private-labels and resells Brocade’s Foundry line of switches.
It’s not the last piece of the full stack puzzle for Dell, whose executives have said they are interested in any acquisition that touches the data centre, Silva said. The company doesn’t have HP’s software footprint, nor Cisco’s communications side.
“It’ll be interesting to see what piece they feel they have to fill next,” he said.
“This is probably Phase 1 of what you’ll see them do,” Kerravalla said. “There’ll be more acquisitions down the road,” he said, because Force 10 doesn’t have a full networking portfolio.
Possible targets in Kerravala’s mind include Extreme Networks Inc. [NASDAQ: EXTR] and wireless LAN manufacturers Aruba Networks Inc. [NASDAQ: ARUN] and Meru Networks Inc. [NASDAQ: MERU].
“Computing and networking are coming together,” Kerravala noted, pointing to Cisco’s move to sell UCS blades, HP’s acquisition of 3Com and Intel’s purchase this week of Fulcrum Microsystems Inc., a fabless semiconductor company that designs Ethernet switch silicon for data centre network providers. “Having more options is better for customers,” Kerravala said.
The transaction was approved by the board of directors of each company. Additional terms were not disclosed. The acquisition is expected to close in late summer.
– With files from Jim Duffy, Network World (U.S.)Related Download
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