Brocade to Acquire Foundry Networks to Conquer WAN to SAN and Points In Between

| Jul 23, 2008 | Carrier Infrastructure | Competitive Intelligence Report

| Analyst: Glen Hunt

Current Perspective: Positive
Vendor Importance: Very High
Market Impact: High

Event Summary

July 21, 2008 - Brocade announced a definitive agreement to purchase Ethernet switch pioneer Foundry Networks. The acquisition will bolster Brocade’s position as a leading provider of enterprise and service provider solutions from the Internet to the data center. It brings together two financially strong companies in complementary technology sectors, and combined they can create unique synergies and leverage their respective strengths to potentially accelerate growth and innovation in key markets.

Analytical Summary

• Current Perspective: Positive on the announcement that Brocade and Foundry have entered into a definitive agreement whereby Brocade will acquire Foundry. The combined company will have the financial strength and technical solutions to address the needs of next-generation data centers and service providers’ next generation packet based networks. The deal is targeted to close this year and comes at time where both companies are at the top of their game, just having recently posted strong quarterly results. Brocade will be the survivor, but stresses that it is about combining two technically strong companies to form an entity capable of addressing much larger and more dynamic market segments than they could do separately. Brocade will pay $3B for Foundry, of which it will finance about one-half that amount, and expects positive results from operations as early as late 2009, giving this acquisition one of the best chances for survival in recent years.

• Vendor Importance: Very high to both companies, since they were both already doing well before the decision to merge and this creates a high expectation by Brocade’s stock holders that the move will be worth the expense and that it will propel it into the next level as an end to end network provider. The move brings with it the normal issues associated with an acquisition; however, Brocade has perhaps an easier trek through potential mine fields than other companies since there is minimal product overlap, and because there is the possibility for significant synergy as a result of combining the two product portfolios. Also of significance is that the synergies expected will come from supply chain optimization and G&A consolidations, rather than the kind of potentially devastating cuts in R&D and Sales and Marketing featured in more defensive mergers.

• Market Impact: High on the carrier Ethernet switching and routing market, as well as the SAN market, because Brocade will have the portfolio depth to become a more significant end to end provider of solutions that cover everything between the IP core and the storage area network. As service providers and enterprises look to deal with fewer suppliers in the supply chain, this elevates Brocade’s position and appeal. The combination of the two companies also gives the customers of each company potential access to more products which they can leverage for their networks; the move also has the potential for their OEM and VAR partners to play in a larger solution space. Brocade will, however, continue to experience strong competition from solutions providers such as Cisco, which has been highly successful with its data center, carrier Ethernet and enterprise solutions. Brocade can also expect assaults on its position from startups pushing the latest technologies for the lowest price.

Recommended Competitor Actions

• Alcatel-Lucent should highlight the depth of its service provider portfolio, as well as its enterprise portfolio, which includes products such as the OmniSwitch 9000 product family -- its new generation switches for the enterprise core, data center, aggregation layer, and wiring closet. Alcatel-Lucent should highlight the success of its IP portfolio plus the OS9000 to support next generation network backbone migrations, multi-layer security with 802.1x, and IPv6, to meet corporate and emerging government requirements.

• Cisco should expect greater competition from the new Brocade and insure that it follows through on any loose ends related to its Data Center 3.0 vision and NEXUS series product capabilities. Cisco needs to continue to tout the value of a managed network in the next-generation data center and service provider markets. Cisco needs to continue to hammer on the need for management and OAM to evolve with the next-generation data center, and not devolve into a focus on network “plumbing.”

• Juniper should highlight its latest moves to assist service providers to deploy new services and attract higher value revenue streams. Juniper should contrast its service provider portfolio (core – access) with that of the new Brocade, showing its customer traction in virtually all market segments. Juniper should highlight its data center solutions which exploit the strengths of its EX-/MX-series platforms, and its security platforms that ensure the security of the data center, branch and remote workers.

• Startup vendors such as Woven and Arastra should highlight that they comply with all relevant IEEE Ethernet standards and are easily inserted and managed in a multi-vendor network to counter the end to end proposition offered by Brocade. Arastra should hype its 7100 series of 10 Gig switches, and Woven Systems should show off its EFX 1000 Ethernet Fabric Switch as being best of breed and on the leading edge in terms of performance and scalability.

• Nortel should highlight the vision and capabilities of its data center solutions, such as its Virtual Services Switch (VSS) 5000 which consolidates multiple functions onto a single device, such as Firewalls, Switching L4-L7, SSL Acceleration, IPS, and ITM. Nortel should stress that “less is more” when it comes to reducing CAPEX and OPEX (fewer devices, less power, lower cooling needs, and decreased square footage), and helps accelerate Time-To-Service (TTS), to improve service delivery and application availability.

Recommended End User / Customer Actions

• Existing Foundry VARs should press Brocade for assurances that it will continue to support the existing programs and expand them to include the full portfolio to broaden their addressable market. This will improve their cross-selling opportunities.

• Existing Foundry service provider and direct enterprise customers should press Brocade for assurances that the Foundry product portfolios will continue to be enhanced and supported. Service providers should leverage the expanded portfolio to reduce the number of vendors that they need to deal with for an end to end solution.

• Existing Brocade OEMs should be assured that they will not be negatively impacted by the addition of internal platforms that may compete with their overall solutions. Since Foundry offers a complete suite of carrier Ethernet solutions for access/aggregation and IP core, they should consider leveraging the broader portfolios to enhance their solutions.

• Existing Brocade customers should press Brocade to provide product roadmaps as soon as possible in order for them to evaluate the merits of switching to Foundry gear for their switching needs. Brocade should prepare a data center architecture/roadmap showing the overall synergies.

• Enterprise users that have a strong allegiance to a single vendor should consider Foundry for its solutions, because Foundry's gear offers equally high performance and provides leverage (i.e., pricing, discounts, etc.) in an environment where the user might otherwise be locked into a single-vendor network. Foundry’s key value proposition is higher performance and greater per-slot density at a lower price.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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