Daily Archives: October 7, 2009

Oracle Not Interested in Brocade

Brocade might be for sale, but Oracle CEO Larry Ellison says his company won’t be the buyer.

Ellison disavowed interest in Brocade during a keynote address to shareholders attending the company’s annual meeting this evening.

As I discussed earlier today, Oracle was unlikely to acquire Brocade. Oracle is preoccupied, waiting to see whether the European Commission will approve its $7.4-billion acquisition of Sun Microsystems.

Sun’s technologies, including its OpenSolaris operating system, would likely form the basis for an Oracle foray into computer networking. Until the Sun acquisition gets the official nod, Oracle won’t even begin to consider how it can pursue a converged data-center strategy with acquisitions of network-equipment vendors. Even if it does decide subsequently to make networking acquisitions, Brocade might not be its first choice.

With Oracle out of the running, and HP apparently not interested in taking the plunge (at least for now), who else might be interested in buying Brocade? Juniper was mentioned as a potential buyer, but I can’t see it, for the reasons I put forward in my earlier post.

As noted in those jottings, IBM is probably the player whose eye Brocade wants to catch. That doesn’t mean IBM will pay notice, even though it does account for approximately 20 percent of Brocade’s revenue through a reseller/OEM partnership. IBM is pursuing a data-center strategy that emphasizes software intelligence and systems integration, relegating hardware to nothing more than underlying plumbing.

Now that Larry Ellison has failed to play along with Brocade’s head fake, the networking vendor and its agent, boutique investment bank Qatalyst, are left feeling like liquor salesmen in a dry county: they’re ready to do business, but nobody’s able or willing to buy the goods.

One consolation, though it might be short-lived, is that Brocade’s shares have appreciated in value as the takeover talk has intensified.

Dell to Shutter Its Largest American Assembly Plant

That didn’t last long — just four years, to be precise.

In 2005, Dell opened a desktop-computer assembly plant in Winston-Salem, North Carolina, after being promised more than $300 million in state and local incentives. The catch was that Dell had to commit to invest $100 million, create 1,700 jobs by September 2010, and maintain those positions for 10 years. If the terms weren’t met, Dell would be compelled to forfeit the incentive package.

Well, Dell hasn’t met the targets, and it says it will forfeit or otherwise pay restitution on the incentives it received.

That’s because Dell announced today it will close the 750,000-square-foot plant, laying off 905 employees in the process. About 600 plant workers will be laid off in November, and the remaining 305 employees will be cut on or before January 2010, when the plant will be shuttered.

The decision comes just two days after the $110-million plant, which had been Dell’s largest remaining manufacturing facility in North America, turned four years old. Dell has a plant in North Austin that assembles servers, and its Miami-based Alienware subsidiary makes specialized gaming rigs, but it no longer has desktop or notebook manufacturing or assembly operations in the United States.

In June, Dell sold its Lebanon, Tenn., remanufacturing plant to contract manufacturer Genco; and early this year, Dell announced that it would move European manufacturing operations from Ireland to Poland, triggering a controversy in the process. Irish politicians accused Dell of using “dubious” methods to close the Irish facility so that it could receive a multi-million-euro windfall for moving operations to Poland.

Dell said it is closing the North Carolina plant “as part of an ongoing initiative to enhance the long-term value it delivers to customers by simplifying operations and improving efficiency.” That’s “corporatese” for saying that Dell will save money by manufacturing the computers elsewhere.

I understand that Dell is under intense competitive pressure for market share and profit margins in its desktop and notebook PC businesses. I also understand that Dell must seek lower costs and greater efficiency from its manufacturing operations.

Dell will have to be careful, however, not to develop a reputation as a company that cuts and runs from agreements with governments. In that context, it is imperative for Dell to make good on its obligations to its erstwhile government partners in North Carolina.

Dell Should Rethink Smartphone Strategy

Dell reportedly will offer an enhanced version of its Dell Mini 3i smartphone, originally intended exclusively for the Chinese market, to carriers and their subscribers in America.

Presuming the CrunchGear report is accurate, I’m not sure what Dell hopes to accomplish with the move.

Even if Dell makes the phone slimmer, gives it a better case, and improves the built-in camera, what is the market niche Dell believes this handset can exploit? It has all the signs of a me-too Android smartphone, with nothing to competitively differentiate it or to make it a must-have item for consumers or business users.

It isn’t enough for Dell to just offer an Android handset. Others can offer the same thing, and many of those vendors have better mobile brands and well-established relationships with wireless operators.

Given Dell’s recent acquisition of Perot Systems and Google’s stated objective of establishing Google Apps as a credible collaboration alternative to Microsoft Office in government and other public-sector verticals, Dell should consider how it could devise a compelling mobile offering — handsets and services — for those market segments.

I bet Google would be happy to provide assistance.

Ciena Puts Stalking-Horse Bid on Table, Hopes for No Opposition

Some media sources have incorrectly reported – at least in their headlines — that Ciena has bought the optical-networking and carrier-Ethernet portions of Nortel Networks Corp.’s Metropolitan Ethernet Networks (MEN) division for about $521 million in cash and stock.

What’s actually happened is that Ciena has filed an official stalking-horse bid for most of Nortel’s MEN assets. Ciena has offered $390 million and 10 million of its shares, currently worth $131 million. Since the assets will be sold at auction, other parties can get involved, potentially outbidding Ciena. If Ciena gets its way, however, the deal will close in the first quarter of 2010.

In a departure from previous Nortel asset auctions, the Ciena bid would entitle the buyer to receive Nortel intellectual property and patents along with relevant products and technologies. Those products and technologies include Nortel’s long-haul optical transport portfolio; metro optical Ethernet switching and transport products; Ethernet transport, aggregation, and switching technology; multiservice SONET/SDH product families; and network management software products.

As part of the agreement, Ciena will offer jobs to at least 2,000 Nortel employees, about 85 percent of the total of those remaining in the MEN operations. Doubtless this provision was inserted not only to burnish Nortel’s besmirched corporate image in Canada, but also to ensure that the agreement meets little or no resistance from Canadian regulators. Ciena has operations in the Ottawa area already.

Based on the current agreement and given the structure of the transaction, Ciena expects to incur integration-related costs of approximately $180 million. Ciena sees the deal being accretive to its operational results during its 2011 fiscal year.

It is not a done deal, though. While Ciena clearly is hoping nobody challenges it for the right to own the Nortel’s assets, other bidders could surface. Ericsson, Nokia Siemens Networks, and Infinera, which recently opened an Ottawa-based design center, have been mentioned as potential counterbidders.

Mark Sue of RBC Capital Markets had an interesting take on what Ciena is trying to achieve by being so aggressive about its intentions. Said he:

“Sometimes dragging the girl out to the dance floor makes other dudes less inclined. There are other hound dogs sniffing around.”

Dodgy metaphors aside, if other dogs are on the trail, the game could get too rich for Ciena’s blood. Sue and others have expressed concerns about Ciena’s capacity to integrate the acquisition, and Sue has warned that Ciena should refrain from paying too much for the privilege of owning the Nortel assets. Any price marginally above the current bid probably would be considered too much by many analysts that follow Ciena closely.

Ciena needs to tread carefully. A Nortel deal could give it a scale that would make it a more attractive supplier to carrier customers, but it also could result in disaster if the transaction price is too high – placing significant debt on Ciena’s balance sheet – or if the post-merger integration is poorly executed.

Much now depends on whether a competitive bid emerges.

HP Circles Brocade and Juniper while IBM Remains on Sidelines

After reading a Wall Street Journal piece about how Juniper Networks could emerge as a potential acquirer of Brocade Communications, I thought about what it all might mean.

When Brocade or its agent Qatalyst Partners leaked that the company was up for grabs and that HP and Oracle were potential buyers, I thought probably just one of those companies had expressed solicited or unsolicited interest in buying Brocade. Since then, we’ve learned that HP has taken a look at Brocade, but has yet to decide whether it wishes to make an acquisition bid.

Oracle is playing its cards close to its vest, and understandably so. Much of Oracle’s data-center master plan turns on its owning and integrating the assets of Sun Microsystems. With the fate of the Sun deal undecided, potentially for as long as three months, Oracle isn’t in a position to make an acquisition predicated on owning and assimilating Sun.

Knowing what we seem to know – that HP has kicked the tires, but has not yet decided whether it wants to buy Brocade, and that Oracle is in an extended holding pattern – why has Brocade put up the for-sale sign?

This is where Juniper enters the picture. One could make a plausible case for Juniper wanting to acquire Brocade. It’s a possibility, yes; but I don’t think it’s probable.

That’s because Brocade would be an expensive proposition for Juniper to digest, with significant product overlap on the Foundry side of Brocade’s house. What’s more, Juniper has eschewed large acquisitions ever since its fraught purchase of firewall-market leader NetScreen Technologies back in 2004. That $4-billion all-stock deal was a bear for Juniper to integrate. It took a long time to align the NetScreen and Juniper executive teams, and the porting of NetScreen’s security software to Juniper’s JUNOS took longer than the vast majority of observers anticipated. Juniper found out the hard way that acquisitions can look good on paper, but making people, products, and technologies work together goes beyond the page.

One can make a case that Juniper might want Brocade’s fiber-channel SAN switching, but I think Juniper would rather roll its own or buy a smaller company than go through the headache and overhead (porting to JUNOS, etc.) that a costly, large-scale acquisition of Brocade would entail.

Besides – and here’s the kicker – Juniper is probably a seller, not a buyer, in the computer-networking industry’s consolidation market.

Call options on Juniper have gone up recently, with market movers and shakers wagering that the company’s stock will appreciate in value during the next few months. These option buyers wouldn’t be betting on an appreciation in Juniper’s share price if they believed the company were about to pull the trigger on a costly and complicated acquisition. The only explanation is that they are expecting the company to have a very strong fall quarter, with encouraging forward guidance, or that they are expecting the company to be sold at a reasonably attractive premium.

Meanwhile, HP seems to be considering a purchase of either Juniper or Brocade. Each company would offer HP ProCurve Networking something it doesn’t have today, but a Juniper acquisition would give it the high-end routing and data-center switching it needs to take the fight to Cisco. Brocade would be a less-ambitious acquisition, and substantially less costly, but HP might figure that it’s in an all-or-nothing situation in the data center. With it finally getting past its integration of professional-services behemoth EDS, HP could be ready to make another big buy.

An acquisition of Juniper wouldn’t be a snap for HP to pull off from a product-integration standpoint, but HP might have the confidence it can do it successfully after its experience assimilating EDS.

If HP moves on Juniper, where does that leave Brocade? Out in the cold and looking for shelter, I suspect. My guess is the HP and Oracle both looked at Brocade well before that intentional leak from Brocade or Qatalyst surfaced early this week. HP might be heading in another direction, perhaps toward Juniper, and Oracle isn’t prepared to move until the European Commission approves the Sun deal.

Brocade can hear the strains of consolidation-related musical chairs, and it wants to make sure it gets a comfortable seat. On its own, its prospects aren’t that good. But, if it could get IBM to reconsider its vendor-neutral, systems-integration approach to networking hardware, it might find sanctuary. (There might be somebody else that would be interested in Brocade, but I’m not seeing it yet.)

IBM resells Brocade switches and accounts for 20 percent of the latter’s revenue. IBM’s “Dynamic Infrastructure” vision for data-center convergence places power and value in a layer of management software that provides virtualization and automation, effectively relegating underlying networking hardware to little more than plumbing. The IBM approach is similar in some respects to HP’s, but the latter has chosen to own its networking infrastructure while IBM has opted for reseller and OEM relationships with the likes of Juniper and Brocade.

What happens, though, if HP takes Juniper off the table, effectively removing an IBM partner? Even though IBM envisions networking hardware as a less-valuable element of the overall data-center solution, would IBM respond by simply striking another deal to resell another vendor’s networking gear? Or does it reluctantly decide it has no recourse but to become a player in network infrastructure?

That question might become more than hypothetical before the end of this year.