JDN:
I'm sure there are a number of valid business reasons to justify a spin-off. My point is that McData is trying to enter the game a little late and the barrier to entry is quite high. I think that EMC, a company that is always working to increase shareholder value, evaluated the risks of continuing to fund their new product development (a very expensive proposition) in a market that is already dominated by one player (Brocade) with another player trying to make a charge (Ancor). They can see that Vixel and Gadzooks are having trouble penetrating the market even though, like McData, they have years of experience in the FC market albeit with hubs not switches.
From an EMC standpoint, I think spinning McData off is the best solution for the following reasons.
1. I think that McData's products will soon cease to be accretive to earnings until the new generation is released assuming market acceptance. (This, in my opinion, is the primary reason for the spin off.)
2. McData can raise funds via an IPO or Secondary (I'm not sure what it's called in a spin-off scenario) to continue funding their development and marketing efforts which means that the money is not coming out of EMC's pockets.
3. EMC shareholders get the benefit of owning shares in the new company as well as the old.
4. EMC has more choices when it comes to fibre channel switch products with, presumably, a sweetheart deal with regard to pricing from McData.
5. If McData goes belly up, it doesn't hurt EMC or it's shareholders in any financial way. Of course, those of us still holding McData shares might be unhappy but, because it was a spin off, it was "free" money anyway.
It's a win-win situtation for EMC and it's shareholders and the timing is impeccable. If they'd waited six more months I think that McData could have become the figurative albatross around EMC's neck. While it's true that McData could end up being a major player in the FC switch segment, it will require flawless execution of their business plan. In my opinion, EMC wasn't willing to take the considerable risk for the possibility of the considerable rewards. As an EMC shareholder and as a big believer in the future of fibre channel I think they made the right decision. |
