Brocade responds to Cisco: buys intelligent switch maker for $175m
Analyst John Abbott
Sector Storage & Systems
The451
Report date Tue, 5 Nov 2002
Brocade Communications took just over two months to respond to Cisco's August acquisition of Andiamo systems with a counter move of its own. Late on Tuesday evening, Brocade announced an agreement to acquire intelligent switch startup Rhapsody Networks. It said the deal, valued at $175m, would help it launch "the first open, intelligent platform for fabric applications," aimed at its existing OEMS and application partners as well as end-user SAN customers.
Rhapsody has yet to launch its first product, but was evidently preparing to do so before the acquisition, which has been widely rumored. But there is an application development platform for OEMs already available, and Brocade anticipates the first applications will reach the market by the end of next year.
Impact assessment
The message
Brocade has agreed to acquire intelligent switch startup Rhapsody Networks in a stock deal worth $175m. Rhapsody's Storage Application Directors, yet to be released, are multiprotocol, high-port-count switching devices with built in software intelligence for virtualization, capacity management and provisioning. The first revenue from the deal isn't expected until late in fiscal 2003.
Competitive landscape
Rhapsody is one of a group of new-generation switch startups that also includes Cisco's Andiamo, Sun's Pirus Networks and currently independent companies Candera, Maranti, Maxxan, Sanera and Stonefly.
The451 assessment
Following Cisco's Andiamo deal, Brocade had to do something in response. Rhapsody was generally regarded as the most promising of the new startups. With three of them now owned by major companies, it will be tougher than ever for the remaining independents.
Context Rhapsody Networks is one of a group of startups that have taken a fresh look at the world of storage switches and found the current generation wanting. For the last few years, most of these companies – which also include Andiamo Systems, Candera (previously Confluence Networks), Maranti Networks, Maxxan Systems, Pirus Networks, Sanera and Stonefly Networks – have been working behind the scenes on their technology. Most, including Rhapsody, are still secretive about technical details, and their first-generation products haven't yet reached general market availability.
But already it looks as if few will have the resources to enjoy an independent future. Fiber channel-based storage area networking is one of the few bright spots in the networking equipment industry: now the giants are moving in. In August, Cisco acquired Andiamo, a startup it had already been funding, for access to its Multilayer Datacenter Switch 9000 family of products, expected to ship by the end of this year. And in September, Sun Microsystems agreed to acquire Pirus for its intelligent storage switch technology, as a platform for its N1 storage services framework.
Brocade completely dominates the fiber channel storage switch marketplace, and has done so since 1997, when its first SilkWorm fiber channel switches were introduced. However, the next wave is coming, promising a number of new innovations: higher port counts to reduce network complexity; multiprotocol support so that Ethernet/IP, as well as fiber channel networks can be supported; and software intelligence, such as virtualization, so that SAN utilization rates can be increased for greater efficiency and easier management. Brocade has been somewhat skeptical about most of these developments in its public statements, but it has clearly been paying attention. Cisco's move to acquire Andiamo represented the first major threat to its future market dominance.
Technology Rhapsody has said little to date about its forthcoming Storage Application Directors. But they are expected to offer high levels of scalability and throughput in order to reduce network complexity, and to be host- and storage-device-neutral. They will work with current storage applications, and include virtualization, capacity management and provisioning tools. They will be able to manage large networks from a central point of control. Fiber channel, IP and other emerging protocols (such as InfiniBand) will be supported. Rhapsody's underlying technology is called XPath, and the company has been signing up both software and hardware vendors to support it over the last few months.
The deal Under the terms of the agreement, Brocade will acquire all outstanding Rhapsody shares for 23.4 million shares of Brocade common stock (10% of the outstanding stock), valuing the deal at about $175m based on the November 4 closing price. The deal is expected to close in January 2003, and is likely to cut into fiscal 2003 earnings by $0.09 per share. Revenue coming out of the Rhapsody technology should begin in late fiscal 2003, and the transaction should become accretive in the third or fourth quarter of 2004. Rhapsody has just over 100 staff.
For comparison purposes, Cisco has funded Andiamo to the tune of $74m to date, and has committed to providing $100m more before the acquisition closes, no later than July 2004. The total it ends up paying for Andiamo will be calculated using a complex formula, based on sales of Andiamo products in a three-month period shortly preceding the close, and a multiple based on Cisco's sales and market capitalization. It could end up paying up to $2.5bn.
Sun hasn't revealed the details of its stock-for-stock deal to buy Pirus, which is due to close by the end of the year, but the amount paid has been reported as $160m. Pirus had about 120 staff and had raised $55m since it was formed in late 1999. Despite the similarities between Pirus and Rhapsody, Sun says it's not interested in going after the general-purpose switch market. Pirus buys it a virtualization front end for multivendor storage arrays. For switches, Sun has a close relationship with QLogic.
Implications - There is a danger that Brocade will unsettle its core storage partners by moving into competition with them. Most of the storage vendors have their own plans for virtualization, and might not appreciate Brocade muscling in on the business. Take EMC, for instance. Rhapsody recently signed an agreement to embed Veritas' software within its switches. EMC sees Veritas as a threat to its software ambitions with AutoIS.
All the major storage vendors have OEM deals with the company, and if Brocade upsets them, they will be more likely to turn instead to Cisco. But Brocade's current market dominance makes it hard to ignore. It's also well known for its aggressive tactics, and probably won't care too much about upsetting one or more partners if it thinks it can grab more market share.
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