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.