McData 'Super Sizes'

Posted on January 19, 2005

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By Dave Simpson

Earlier this week, McData announced its intention to acquire Computer Network Technology (CNT), which is known primarily for its WAN extension products, in an all-stock transaction valued at approximately $235 million. CNT also sells director-class switches, which it gained from its acquisition of Inrange Technologies in 2003, as well as a variety of other product lines.

McData officials rationalized the acquisition by saying that it accelerates the company's Global Enterprise Data Center strategy, which in part, involves extending the company's reach from SANs into MANs and WANs. And analysts agreed, saying that the main gain for McData is in CNT's extension products, which include the UltraNet appliances and routers.

"McData gets CNT's extension products, which are nice companion products to what McData got in its Nishan Systems acquisition," says Steve Berg, a financial analyst with Punk, Ziegel & Company who covers the storage market. "McData also gets a services organization and a direct sales channel."

Berg notes that these gains may improve McData's competitive positioning against Brocade and Cisco, but that challenges remain, including a high degree of product overlap, a lot of legacy and low-margin products from CNT, and possible backlash from some of McData's larger OEM customers. (Common OEM customers for the two companies include Dell, EMC, Hewlett-Packard, Hitachi Data Systems, IBM, StorageTek, and Sun.)

Analysts say that a lot of the product overlap between the two companies lies in the two lines of director-class switches. McData has its Intrepid line (including the just-announced i10K director), while CNT sells the UltraNet Multi-service Director (UMD)--two product lines that compete with each other. McData is the market share leader in the director space.

McData officials declined to provide any information on product integration or discontinuation plans, or on how the deal will affect product road maps.

Many analysts saw the acquisition as an offensive/defensive reaction to Cisco's increasing presence in the storage switch market, as well as a move to combat Brocade. But analysts doubted whether the acquisition would materially affect the market share standings.

In terms of revenue, Brocade has the lion's share (49.1%) of the switch/director market, followed by McData at 28.2%, Cisco at 14.5%, QLogic at 4.7%, and CNT at only 3.2%, according to the Dell'Oro Group research firm.

If the acquisition is finalized, the combined company will have annual revenues of about $800 million.


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