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TMCNet:  Brocade to pay $3B to buy Foundry Networks

[July 21, 2008]

Brocade to pay $3B to buy Foundry Networks

(AP Online Via Acquire Media NewsEdge) SAN FRANCISCO_Brocade Communications Systems Inc. is plunking down $3 billion for Foundry Networks Inc., melding two companies with presence deep in the data center and posing a direct challenge to industry behemoth Cisco Systems Inc.


The deal announced Monday represents an attempt by San Jose-based Brocade to expand beyond data storage equipment and begin selling machines used to shuttle Internet traffic, Cisco's home turf.

Brocade dominates the market for a type of switch that connects servers to data storage machines, but it's under pressure.

Cisco is a small player in that area, but has long been the leading provider of routers and switches that direct Internet traffic. That industry has become increasingly attractive as Internet traffic, particularly bandwidth-hogging video, has exploded, and companies and Internet service providers have to spend mightily to upgrade their networks.

Foundry is a smaller competitor to Cisco in that area.

The acquisition promises to make Brocade a more well-rounded competitor to Cisco, but isn't likely to substantially dent Cisco's dominance because Foundry Networks is considered a niche player, albeit at the high end of the market, which means the company can command higher prices and healthy profit margins.

Despite its smaller size _ Foundry had $607 million in sales last year, compared with Cisco's $29 billion _ Foundry is known for its innovative technologies and has a loyal base of customers in the government, health care and financial services industries.

Foundry Networks owned just 2 percent of the market for Ethernet switches last year, while Cisco commanded 71 percent, a huge lead in supplying primarily large corporations with gear that makes up a big part of their underlying networking infrastructure, according to data from the Dell'Oro Group research firm.

Alan Weckel, a senior analyst with Dell'Oro, said competitive pressures probably drove Brocade into pursuing Foundry Networks, since Cisco is pushing a convergence of technologies that threatened Brocade's business.

Brocade specializes in switches that use so-called Fibre Channel technology.

As servers become more powerful, and information technology managers demand more control over increasingly complicated machinery, Cisco has been advocating that the Fibre Channel and Ethernet technologies themselves should be merged somewhat _ a direct assault on the core business of Brocade and Foundry Networks, Weckel said.

"Enterprises are really looking to reduce the complexity, especially at the high end of the data centers out there," he said. "So a deal like this was bound to happen. It's just a matter of who and when."

Brocade executives describe the battlefield as being wide open. They add that all the companies in this space are working quickly to develop products for the next generation of data centers, and that a winner hasn't been crowned.

"Together we're going to be a bigger, stronger company," Tom Buiocchi, vice president of marketing for Brocade, said in an interview with The Associated Press. "Companies have been asking us for a high-performance, high-reliability alternative (to Cisco). That's one of the reasons behind this transaction."

Brocade currently has about 2,500 employees, and Foundry Networks has about 1,000, Buiocchi said.

He declined to discuss whether Brocade anticipated any layoffs, but noted that Brocade's and Foundry Networks' product lines don't overlap, so there would be few obvious areas to cut. He said the deal is supposed to be "additive" to Brocade and isn't about cost-cutting.

The purchase price Brocade agreed to pay works out to $19.25 per share, a 41 percent premium to Foundry Networks' closing stock price Monday before the deal was announced.

The deal is expected to close in the fourth quarter of this year and add to Brocade's profits in 2009.

Also on Monday, Foundry Networks reported second-quarter profits that beat Wall Street's expectations.

The company said its net income was $18.3 million, or 12 cents per share, for the three months ended June 30. That represents a 17 percent jump from the $15.6 million, or 10 cents per share, that Foundry earned in the year-ago period.

Excluding one-time charges, the company earned 17 cents per share, two cents per share better than the average estimate of analysts polled by Thomson Financial. Analyst estimates typically exclude one-time charges.

Sales also exceeded analyst forecasts.

Foundry Networks rang up $160.7 million in revenue. Wall Street was expecting $153 million in sales.

Shares of Foundry Networks surged $4.41, or 32.3 percent, to $18.07 in after-hours trading after the acquisition was announced. They had closed up 30 cents, or 2.3 percent, at $13.66 during the regular session.

Brocade shares fell $1.33, or 16 percent, to $7 after-hours. They closed up 6 cents at $8.33 during regular trading hours.

Copyright ? 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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