HP Should Buy Brocade

Shares of Brocade Communications jumped nearly 19% today due to a report in the Wall Street Journal the company has put itself up for sale. Based on today's closing price, Brocade has a market capitalization of $3.8 Billion, which is a relatively low multiple for a company that holds a strong market position in the data center LAN and SAN switching segments to ride the next wave in the transition to a converged network.

Not surprisingly, the WSJ report included speculation on the potential buyers, siting HP and Oracle as the most likely suitors. IMHO, Oracle is a very unlikely suitor given it's preoccupation with the Sun Microsystems acquisition, and the unlikelihood Larry Ellison wants to own a LAN and SAN hardware business.

HP, however, could gain a lot from the acquisition of Brocade's business, particularly in light of its heightened competition and bitter rivalry with Cisco Systems since the networking behemoth entered the market for blade servers this Spring. Let's take a closer look at the various dynamics at work that make an HP-Brocade marriage a good bet:

• With the trend toward IT industry consolidation heating up, many of the large, enterprise IT vendors are finding it cheaper and less risky to buy and control their own destiny than build R&D and/or forge partnerships with companies that might one day be their fiercest competitor... Precisely what happened to HP when it once enjoyed being a 10% customer for Cisco as a reseller of its switches and routers, only to later become its biggest target in the server market.
• There is a large push towards a converged IT infrastructure to deliver more agility and less complexity to IT operations. The converged network (aka Unified Fabric) is a big piece of this vision, bringing together IP, Ethernet, Fibre Channel, CNAs and switch ports. When it comes to networking, Cisco is in a position of strength, both in market share and driving the standards bodies. The only other networking and storage interconnect company with great technology and the FC installed base to compete with Cisco is Brocade.
• Although HP has recently beefed up its networking business with its own ProCurve line of Ethernet switches, it's rarely deployed in the core of the network, and to date, HP has yet to articulate a comprehensive roadmap or a compelling story around FCoE or DCB to its enterprise customers who are keenly interested in hearing about its converged network vision.
• HP ProCurve could be repositioned for the access and aggregation layers of the network while Brocade's Foundry Ethernet/IP switches could be positioned in the core along with its FC Directors and FCoE convergence products so there would be very little product overlap and the merged technologies would be a genuine challenger to Cisco.

One of the potential areas of concern would be around the impact to Brocade's OEM business should HP acquire Brocade. Reportedly, IBM is a 15%-20% revenue customer for Brocade and EMC is a 10% customer. Worst case scenario, it could mean a 25 -30% hit to revenue if the IBM and EMC OEM business went away entirely. Perhaps EMC could funnel all its FC switching business to Cisco in retaliation, but that would be unlikely given Brocade's FC installed base. As for IBM, they have multiple reseller agreements, including Brocade, Cisco, and Juniper, and they are currently supporting Juniper's development of an FCoE switch, so a change in control with respect to Brocade probably wouldn't make much of a difference.

In summary, I think HP and Brocade would be a terrific match. It would be great for the two companies as well as the industry, and it would certainly give Cisco a force to be reconned with in its quest for domination of the data center.