Big Bro goes for 73% market share

Brocade’s announcement last month that it will acquire archenemy McData (for an eyebrow-raising $713 million) didn’t come as much of a surprise (except to those expecting Cisco to beat Brocade to the punch), but it did create a lot of questions. The storage industry has been rife with mergers and acquisitions over the past few years, but the marriages never come with the product overlap that the Brocade-McData deal does, and integrating and/or rationalizing the combined companies’ portfolios will be a difficult challenge.

In the core product lines (fabric switches and directors), there’s almost a total overlap. It doesn’t seem likely that Brocade will jettison the products that it has (successfully for the most part) fought McData with over the past few years. Even the Reyes-less Brocade has too much hubris for that. As such, the new company will have to ax some of McData’s product lines or support multiple, overlapping lines-an option at odds with the planned “synergies” (cost-cutting opportunities). One option for Brocade would be to jettison McData’s fabric switches but keep the director-class switches, offering two high-end product lines at different price points to more effectively combat Cisco.

But the challenge goes beyond overlap in the core product lines. McData is sort of a patchwork quilt that resulted from a variety of acquisitions over the past few years, including Computer Network Technology (CNT), Nishan Systems, and Sanera. (CNT, in turn, had acquired Inrange.) Brocade already has products in some of those categories, but not in others.

Storage-focused financial analysts say it’s not too weird to have only three key players (Brocade, Cisco, and QLogic) in a market the size of the SAN switch market. But what would be weird is if those crazy rumors about Cisco exiting the storage market proved true. That would give Big Bro a virtual monopoly.

As it stands now, Brocade-McData will have a market share of about 73%, followed by Cisco at 21.5% and QLogic at 4.6%, based on Q1 2006 revenue figures.

Is $713 million too steep a price to pay for a rival that was clearly struggling on all fronts? Probably, but waiting a few quarters would have been too risky.

Although Cisco apparently did not bid on McData this time around, I’m sure Cisco would have jumped in as the asking price got lower. As such, Brocade had little choice on the timing.

In the long run, I think this was a smart move by Brocade. But in the short run, Cisco will capitalize by spreading FUD around McData sites, and QLogic (which partners with Cisco) could capitalize by grabbing some more market share at the low-end of the fabric switch space.

For more information on the deal, see “Brocade to acquire McData,” p. 16.

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Dave Simpson

This article was originally published on September 01, 2006