Hoping to reverse storage switch market share gains by Cisco (Quote) and Brocade (Quote), McData (Quote) announced the acquisition of WAN connectivity specialist Computer Network Technology (Quote) on Tuesday.
McData called the acquisition "a major acceleration of its Global Enterprise Data Center strategy." The all-stock transaction was valued at $235 million in equity and debt.
"The opportunity to deliver a comprehensive, customer-driven storage networking solution to a more diverse enterprise market is compelling," stated John Kelley, chairman, president and CEO of McData. "We believe this acquisition furthers our Global Enterprise Data Center strategy of delivering a broadened tiered network infrastructure to our customers and partners that provides access to information anytime, anywhere."
McData said the combined company "will provide customers with the long-term confidence that their strategic requirements for a storage networking infrastructure needed for increased productivity, business continuity and regulatory compliance will be met."
Analysts were a little more skeptical, however.
"I think it would be hard to reverse the Brocade and Cisco share gains," analyst Kaushik Roy of Susquehanna International Group told Enterprise Storage Forum. "One could argue that the merger could slow the rate of market share loss, but considering that both of these companies are going through new product introductions, and that these products — high-end directors, CNT's UMD and McData's i10K — would most likely need to be consolidated, there would be confusion amongst customers in the near future and thus I think it would be hard to slow down the market share loss to Brocade and Cisco."
"Let's think about it from a customer's perspective," Roy added. "Customers who are buying very high-end switches are not very price sensitive — these customers are willing to pay for high-end features. What added benefit does a customer have from a combined company? I am not sure there is any."
Baird analysts Daniel Renouard, Frank Timons and Joel Inman were also cautious on the deal. "Despite a relatively attractive acquisition price and cost-synergy potential, this deal appears to be mostly about getting bigger to compete with Cisco," they wrote in a research note. "Given the risks associated with combining two large
organizations and ongoing competitive pressures, our initial reaction suggests some
caution is appropriate."
But Enterprise Strategy Group senior analyst Nancy Hurley saw promise in the union.
"This isn't about Brocade and Cisco doing damage to McData, this is about McData setting themselves up to be a different type of company," Hurley told ESF. With CNT, they get a full end-to-end portfolio and the services business. McData is really targeting CNT's WAN connectivity business and installed base and their services business. The services business helps them get closer to the end user, and offers more value to the customer than just being the infrastructure vendor. This was the strength of CNT. This is not about the UMD — McData already has an extremely similar product in the i10K — so expect that one will eventually go away. I'm guessing the UMD."
The announcement came on the same day that McData unveiled its new director-class i10K. McData has been losing director share to Brocade and Cisco, but on the plus side, CNT grew director revenue even faster in the third quarter than either Brocade or Cisco, according to Dell'Oro Group.
Under the terms of the agreement, which was approved by both companies' boards of directors, CNT shareholders will receive 1.3 shares of McData Class A common stock for each share of CNT common stock. Upon completion of the transaction, which is expected in McData's fiscal second quarter, McData and CNT stockholders will own approximately 76% and 24%, respectively, of the combined company.
Operating income improvement as a result of the merger is estimated to be in the range of $25-$35 million annually, beginning in the first full fiscal year after the transaction is closed. McData said it anticipates that the combined entity will achieve the company's standalone non-GAAP operating margin target of 10% by the fiscal fourth quarter. One-time cash costs associated with the transaction are expected to be in the range of $40-$50 million.
McData said the merger will expand its growth potential through new solutions, increased efficiency, a broader range of technologies, products and services and expanded sales opportunities, particularly in Europe. The combination will result in complete networking capability solutions across storage area networks (SANs), metro area networks (MANs) and wide area network (WAN), McData said.
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