Further Progress of Infineta

When I attended Network Field Day 3 (NFD3) in the Bay Area back in late March, the other delegates and I had the pleasure of receiving a presentation on Infineta Systems’ Data Mobility Switch (DMS), a WAN-optimization system built with merchant silicon and designed to serve as a high-performance data-center interconnect for applications such as multi-gigabit Business Continuity/Disaster Recovery (BCDR), cross-site virtualization, and other variations on what Infineta calls “Big Traffic,” a fast-moving sibling of Big Data.

Waiting on Part II

I wrote about Infineta and its DMS, as did some of the other delegates, including cardigan-clad fashionista Tony Bourke  and avowed Networking Nerd Tom Hollingsworth. Meanwhile, formerly hirsute Derick Winkworth, who goes by the handle of Cloud Toad, began a detailed two-part serialization on Infineta and its technology, but he seems to be taking longer to deliver the sequel than it took Francis Ford Coppola to bring us The Godfather: Part II.

Suffice it to say, Infineta got our attention with its market focus (data-center interconnect rather than branch acceleration) and its compelling technological approach to solving the problem.  I thought Winkworth made an astute point in noting that Infineta’s targeting of data-center interconnect means that the performance and results of its DMS can be assessed purely on the basis of statistical results rather than on human perceptions of application responsiveness.

Name that Tune 

Last week, Infineta’s Haseeb Budhani, the company’s chief product officer, gave me a update that coincided with the company’s announcement of FlowTune, a software QoS feature set for the DMS that is intended to deliver the performance guarantees required for applications such as high-speed replication and data backup.

Budhani used a medical analogy to explain why FlowTune is more effective than traditional solutions. FlowTune, he said, takes a preventive approach to network congestion occasioned by contentious application flows, treating the cause of the problem instead of responding to the symptoms.  So, whereas conventional approaches rely on packet drops to facilitate congestion recovery, FlowTune dynamically manages application-transmission rates through a multi-flow mechanism that allocates bandwidth credits according to QoS priorities that specify minimum and maximum performance thresholds.   As a result, Budhani says, the WAN is fully utilized.

Storage Giants

Last week, Infineta and NetApp jointly announced that the former has joined the NetApp Alliance Partner Program. In a blog post, Budhani says Infineta’s relationships with storage-market leaders EMC and NetApp validate his company’s unique capability to deliver “the scale needed by their customers to accelerate traffic running at multi-Gigabit speeds at any distance.”

A software update, FlowTune is available to all Infineta customers. Budhani says it’s already being  used by Time Warner.

Advertisement

Dell’s Steady Progression in Converged Infrastructure

With its second annual Dell Storage Forum in Boston providing the backdrop, Dell made a converged-infrastructure announcement this week.  (The company briefed me under embargo late last week.)

The press release is available on the company’s website, but I’d like to draw attention to a few aspects of the announcement that I consider noteworthy.

First off, Dell now is positioned to offer its customers a full complement of converged infrastructure, spanning server, storage, and networking hardware, as well as management software. For customers seeking a single-vendor, one-throat-to-choke solution, this puts Dell  on parity with IBM and HP, while Cisco still must partner with EMC or with NetApp for its storage technology.

Bringing the Storage

Until this announcement, Dell was lacking the storage ingredients. Now, with what Dell is calling the Dell Converged Blade Data Center solution, the company is adding its EqualLogic iSCSI Blade Arrays to Dell PowerEdge blade servers and Dell Force10 MXL blade switching. Dell says this package gives customers an entire data center within a single blade enclosure, streamlining operations and management, and thereby saving money.

Dell’s other converged-infrastructure offering is the Dell vStart 1000. For this iteration of vStart, Dell is including, for the first time, its Compellent storage and Force10 networking gear in one integrated rack for private-cloud environments.

The vStart 1000 comes in two configurations: the vStart 1000m and the vStart 1000v. The packages are nearly identical — PowerEdge M620 servers, PowerEdge R620 management servers, Dell Compellent Series 40 storage, Dell Force10 S4810 ToR Networking and Dell Force10 S4810 ToR Networking, plus Brocade 5100 ToR Fibre-Channel Switches — but the vStart 1000m comes with Windows Server 2008 R2 Datacenter (with the Hyper-V hypervisor), whereas the vStart 1000v features trial editions of VMware vCenter and VMware vSphere (with the ESXi hypervisor).

An an aside, it’s worth mentioning that Dell’s inclusion of Brocade’s Fibre-Channel switches confirms that Dell is keeping that partnership alive to satisfy customers’ FC requirements.

Full Value from Acquisitions

In summary, then, is Dell delivering converged infrastructure with both its in-house storage options, demonstrating that it has fully integrated its major hardware acquisitions into the mix.   It’s covering as much converged ground as it can with this announcement.

Nonetheless, it’s fair to ask where Dell will find customers for its converged offerings. During my briefing with Dell, I was told that mid-market was the real sweet spot, though Dell also sees departmental opportunities in large enterprises.

The mid-market, though, is a smart choice, not only because the various technology pieces, individually and collectively, seem well suited to the purpose, but also because Dell, given its roots and lineage, is a natural player in that space. Dell has a strong mandate to contest the mid-market, where it can hold its own against any of its larger converged-infrastructure rivals.

Mid-Market Sweet Spot

What’s more, the mid-market — unlike cloud-service providers today and some large enterprise in the not-too-distant future — are unlikely to have the inclination, resources, and skills to pursue a DIY, software-driven, DevOps-oriented variant of converged infrastructure that might involve bare-bones hardware from Asian ODMs. At the end of the day, converged infrastructure is sold as packaged hardware, and paying customers will need to perceive and realize value from buying the boxes.

The mid-market would seem more than receptive to the value proposition that Dell is selling, which is that its converged infrastructure will reduce the complexity of IT management and deliver operational cost savings.

This finally leads us to a discussion of Dell’s take on converged infrastructure. As noted in an eChannelLine article, Dell’s notion of converged infrastructure encompasses operations management, services management, and applications management. As Dell continues down the acquisition trail, we should expect the company to place greater emphasis on software-based intelligence in those areas.

That, too, would be a smart move. The battle never ends, but Dell — despite its struggles in the PC market — is now more than punching its own weight in converged infrastructure.

Cisco’s Storage Trap

Recent commentary from Barclays Capital analyst Jeff Kvaal has me wondering whether  Cisco might push into the storage market. In turn, I’ve begun to think about a strategic drift at Cisco that has been apparent for the last few years.

But let’s discuss Cisco and storage first, then consider the matter within a broader context.

Risks, Rewards, and Precedents

Obviously a move into storage would involve significant risks as well as potential rewards. Cisco would have to think carefully, as it presumably has done, about the likely consequences and implications of such a move. The stakes are high, and other parties — current competitors and partners alike — would not sit idly on their hands.

Then again, Cisco has been down this road before, when it chose to start selling servers rather than relying on boxes from partners, such as HP and Dell. Today, of course, Cisco partners with EMC and NetApp for storage gear. Citing the precedent of Cisco’s server incursion, one could make the case that Cisco might be tempted to call the same play .

After all, we’re entering a period of converged and virtualized infrastructure in the data center, where private and public clouds overlap and merge. In such a world, customers might wish to get well-integrated compute, networking, and storage infrastructure from a single vendor. That’s a premise already accepted at HP and Dell. Meanwhile, it seems increasingly likely data-center infrastructure is coming together, in one way or another, in service of application workloads.

Limits to Growth?

Cisco also has a growth problem. Despite attempts at strategic diversification, including failed ventures in consumer markets (Flip, anyone?), Cisco still hasn’t found a top-line driver that can help it expand the business while supporting its traditional margins. Cisco has pounded the table perennially for videoconferencing and telepresence, but it’s not clear that Cisco will see as much benefit from the proliferation of video collaboration as once was assumed.

To complicate matters, storm clouds are appearing on the horizon, with Cisco’s core businesses of switching and routing threatened by the interrelated developments of service-provider alienation and software-defined networking (SDN). Cisco’s revenues aren’t about to fall off a cliff by any means, but nor are they on the cusp of a second-wind surge.

Such uncertain prospects must concern Cisco’s board of directors, its CEO John Chambers, and its institutional investors.

Suspicious Minds

In storage, Cisco currently has marriages of mutual convenience with EMC (VBlocks and the sometimes-strained VCE joint venture) and with NetApp (the FlexPod reference architecture).  The lyrics of Mark James’ song Suspicious Minds are evocative of what’s transpiring between Cisco and these storage vendors. The problem is not only that Cisco is bigamous, but that the networking giant might have another arrangement in mind that leaves both partners jilted.

Neither EMC nor NetApp is oblivious to the danger, and each has taken care to reduce its strategic reliance on Cisco. Conversely, Cisco would be exposed to substantial risks if it were to abandon its existing partnership in favor of a go-it-alone approach to storage.

I think that’s particularly true in the case of EMC, which is the majority owner of server-virtualization market leader VMware as well as a storage vendor. The corporate tandem of VMware and EMC carries considerable enterprise clout, and Cisco is likely to be understandably reluctant to see the duo become its adversaries.

Caught in a Trap

Still, Cisco has boxed itself into a strategic corner. It needs growth, it hasn’t been able to find it from diversification away from the data center, and it could easily see the potential of broadening its reach from networking and servers to storage. A few years ago, the logical choice might have been for Cisco to acquire EMC. Cisco had the market capitalization and the onshore cash to pull it off five years ago, perhaps even three years ago.

Since then, though, the companies’ market fortunes have diverged. EMC now has a market capitalization of about $54 billion, while Cisco’s is slightly more than $90 billion. Even if Cisco could find a way of repatriating its offshore cash hoard without taking a stiff hit from the U.S. taxman, it wouldn’t have the cash to pull of an acquisition of EMC, whose shareholders doubtless would be disinclined to accept Cisco stock as part of a proposed transaction.

Therefore, even if it wanted to do so, Cisco cannot acquire EMC. It might have been a good move at one time, but it isn’t practical now.

Losing Control

Even NetApp, with a market capitalization of more than $12.1 billion, would rate as the biggest purchase by far in Cisco’s storied history of acquisitions. Cisco could pull it off, but then it would have to try to further counter and commoditize VMware’s virtualization and cloud-management presence through a fervent embrace of something like OpenStack or a potential acquisition of Citrix. I don’t know whether Cisco is ready for either option.

Actually, I don’t see an easy exit from this dilemma for Cisco. It’s mired in somewhat beneficial but inherently limiting and mutually distrustful relationships with two major storage players. It would probably like to own storage just as it owns servers, so that it might offer a full-fledged converged infrastructure stack, but it has let the data-center grass grow under its feet. Just as it missed a beat and failed to harness virtualization and cloud as well as it might have done, it has stumbled similarly on storage.

The status quo is likely to prevail until something breaks. As we all know, however, making no decision effectively is a decision, and it carries consequences. Increasingly, and to an extent that is unprecedented, Cisco is losing control of its strategic destiny.

Why Nicira Says Networking Doesn’t Need a VMware

At Martin Casado’s Network Heresy blog yesterday, a guest post was offered by Andrew Lambeth, who once led the vDS distributed switching project at VMware but is now, like Casado, ensconced at Nicira.  The post was titled provocatively, “Networking Doesn’t Need a VMWare.”

It was different in substance and tone from Casado’s posts, which typically are balanced, logical, and carefully constructed. I appreciate those qualities. Words matter, and Casado invariably takes the time to choose the right ones and to compose posts that communicate complicated ideas clearly. Even better, he does so without undue vendor bias.

Maybe he’s really a shrewd master of manipulation, but I always get the impression Casado is sincere, that he means what he says and says what he means.  One actually learns something from reading his blog. That’s always refreshing, in this industry or any other.

Defining (or Redefining) Network Virtualization 

As I said, the post from Lambeth was a departure in more ways than one. It was logical and carefully constructed, just like Casado’s writing, but it did not attempt to achieve any sort of balance. Instead, given the venue, it was strikingly partisan and tendentious.

Despite the technical window-dressing, it was devised to differentiate and distinguish Nicira’s approach to network virtualization from those of other players in the space, established vendors and startups alike. It also sought, implicitly if not explicitly, to derogate OpenFlow in the still-unfolding SDN hierarchy of value.

Just to summarize, though I encourage you to read the post yourself, Lambeth argues that, while there’s industry consensus on the desirability of network virtualization, there’s a significant difference of opinion on how it should be achieved. Network virtualization is not at all the same as server virtualization, he writes, citing the need in the former for “scale (lots of it) and distributed state consistency.” He concludes by saying that the current preoccupation with the data path, the realm of OpenFlow, is akin to “worrying about a trivial component of an otherwise enormously challenging problem.”

Positioning and Differentiation

Commenting on Lambeth’s post, Chris Hoff, formerly of Cisco and now with Juniper Networks (and a prolific tweeter,  I might add), concluded correctly that it “smacks of positioning against both OpenFlow as well as other network virtualization startups.”

In issuing that positioning statement, Nicira not only is attempting to distance itself from the OpenFlow crowd; it also has at least a couple specific vendors in mind.

One obvious target is Big Switch Networks. If you visit that vendor’s website,  you will find that it expresses unqualified love for OpenFlow on its home page. It also says candidly that “networking needs a VMware.” Diametrically opposing that view, Nicira says networking doesn’t need a VMware. Furthermore, as I noted in a previous post, Nicira continues to  expend considerable effort to downplay the significance of OpenFlow.

Thinking Beyond Big Switch

But Nicira is thinking about competitors other than Big Switch, too. Readers of this blog will know that of one of my recurring themes — some would call it a conspiracy theory — is that the VCE partnership between Cisco and EMC is subject to increasing strain and tension. In short, EMC acquired VMware, Cisco didn’t, and now virtualization — and maybe VWware — is becoming integral to the future of networking.

Nicira’s Lambeth, formerly involved with distributed switching at VMware, and his counterparts at Big Switch agree that network virtualization is important. Where they disagree, perhaps, is in how it should be achieved.

Meanwhile, both vendors at one time or another, as Lambeth concedes at the outset of his post, have espoused variations on the claim that “networking needs a VMware.” Apparently, the team at Nicira has reconsidered that premise and is going in a different direction.

It might have adjusted course for reasons other than (or in addition to) those relating to architecture and technological requirements.

VMware’s Networking Ambitions

You see, VMware seems to believe that networking already has a VMware, whose name, conveniently enough, is VMware. Circumstantial evidence, including a recent post by VMware CTO Steve Herrod, suggests that VMware has ambitions that extend beyond server virtualization and well into network virtualization. Back in June, Greg Ferro also noted VMware’s interest in carving out a significant role for itself in network virtualization. In his commentary, Ferro cited a post by Allwyn Sequeira, security CTO at VMWare.

Herrod has predicted that “software-defined networking will become a mainstay of data- center architectures” in 2012. It’s safe to assume that he foresees his company playing a major part in making his prognostication a reality.

Dell’s Bid for Data-Center Distinction

Since Dell’s acquisition of Force10 Networks, many of us have wondered how Dell’s networking business, under the leadership of former Cisco Systems executive Dario Zamarian, would chart a course of distinction in data-center networking.

While Zamarian has talked about adding Layer 4-7 network services, presumably through acquisition, what about the bigger picture? We’ve pondered that question, and some have asked it, including one gentleman who posed the query on the blog of Brad Hedlund, another former Ciscoite now at Dell.

Data Center’s Big Picture

The question surfaced in a string of comments that followed Hedlund’s perceptive analysis of Embrane’s recent Heleos unveiling. Specifically, the commenter asked Hedlund to elucidate Dell’s strategic vision in data-center networking. He wanted Hedlund to provide an exposition on how Dell intended to differentiate itself from the likes of Cisco’s UCS/Nexus, Juniper’s QFabric, and Brocade’s VCS.

I quote Hedlund’s response:

 “This may not be the answer you are looking for right now, but .. Consider for a moment that the examples you cite; Cisco UCS/Nexus; Juniper QFabric; Brocade VCS — all are either network only or network centric strategies. Think about that for a second. Take your network hat off for just a minute and consider the data center as a whole. Is the network at the center of the data center universe? Or is network the piece that facilitates the convergence of compute and storage? Is the physical data center network trending toward a feature/performance discussion, or price/performance?

Yes, Dell now has a Tier 1 data center network offering with Force10. And with Force10, Dell can (and will) win in network only conversations. Now consider for a moment what Dell represents as a whole .. a total IT solutions provider of Compute, Storage, Network, Services, and Software. And now consider Dell’s heritage ofproviding solutions that are open, capable, and affordable.”

Compare and Contrast

It’s a fair enough answer. By reframing the relevant context to encompass the data center in its entirety, rather than just the network infrastructure, Dell can offer an expansive value-based, one-stop narrative that its rivals — at least those cited by the questioner —  cannot match on their own.

Let’s consider Cisco. For all its work with EMC/VMware and NetApp on Vblocks and FlexPods, respectively, Cisco does not provide its own storage technologies for converged infrastructure. Juniper and Brocade are pure networking vendors, dependent on partners for storage, compute, and complementary software and services.

HP, though not cited by the commenter in his question, is one Dell rival that can offer the same pitch. Like Dell, HP offers data-center compute, storage, networking, software, and services. It’s true, though, that HP also resells networking gear, notably Brocade’s Fibre Channel storage-networking switches. The same, of course, applies to Dell, which also continues to resell Brocade’s Fibre Channel switches and maintains — at least for now — a nominal relationship with Juniper.

IBM also warrants mention. Its home-grown networking portfolio is restricted to the range of products it obtained through its acquisition of Blade Network Technologies last year. Like HP, but to a greater degree, IBM resells and OEMs networking gear from other vendors, including Brocade and Juniper. It also OEMs some of its storage portfolio from NetApp, but it also has a growing stable of orchestration and management software, and it definitely has a prodigious services army.

Full-Course Fare 

Caveats aside, Dell can tell a reasonably credible story about its ability to address the full range of data-center requirements. Dell’s success with that strategy will depend not only its sales execution, but also on its capacity to continually deliver high-quality solutions across the gamut of compute, storage, networking, software, and services. Offering a moderately tasty data-center repast won’t be good enough.  If Dell wants customers to patronize it and return for more, it must deliver a savory menu spanning every course of the meal.

To his credit, Hedlund acknowledges that Dell must be “capable.” He also notes that Dell must  be open and affordable. To be sure, Dell doesn’t have the data-center brand equity to extract the proprietary entitlements derived from vendor lock-in, certainly not in the networking sphere, where even Cisco is finding that game to be harder work these days.

Dell, HP, and IBM each might be able to craft a single-vendor narrative that spans the entire data center, but the cogency of those pitches are only as credible as the solutions the vendors deliver. For many customers, a multivendor infrastructure, especially in a truly interoperable standards-based world, might be preferable to a soup-to-nuts solution from a single vendor. That’s particularly true if the single-vendor alternative has glaring deficiencies and weaknesses, or if it comes with perpetual proprietary overhead and constraints.

Still Early

I think the real differentiation isn’t so much in whether data-center solutions are delivered by a single vendor or by multiple vendors. I suspect the meaningful differentiation will be delivered in how those environments are further virtualized, automated, orchestrated, and managed as coherent unified entities.

Dell has bought itself a seat at the table where that high-stakes game will unfold. But it isn’t alone, and the big cards have yet to be played.

Reflecting on the Big Acquisition Cisco Didn’t Make

It has been nearly eight years since EMC acquired VMware. The acquisition announcement went over the newswires on December 15, 2003. EMC paid approximately $635 million for VMware, and Joe Tucci, EMC’s president and CEO, had this to say about the deal:

“Customers want help simplifying the management of their IT infrastructures. This is more than a storage challenge. Until now, server and storage virtualization have existed as disparate entities. Today, EMC is accelerating the convergence of these two worlds .“

“We’ve been working with the talented VMware team for some time now, and we understand why they are considered one of the hottest technology companies anywhere. With the resources and commitment of EMC behind VMware’s leading server virtualization technologies and the partnerships that help bring these technologies to market, we look forward to a prosperous future together.”

Virtualization Goldmine

Oh, the future was prosperous . . . and then some. It’s a deal that worked out hugely in EMC’s favor. Even though the storage behemoth has spun out VMware in the interim, allowing it to go public, EMC still retains more than 80 percent ownership of its virtualization goldmine.

Consider that EMC paid just $635 million in 2003 to buy the server-virtualization market leader. VMware’s current market capitalization is more than $38 billion. That means EMC’s stake in VMware is worth more than $30 billion, not including the gains it reaped when it took VMware public. I don’t think it’s hyperbolic to suggest that EMC’s purchase of VMware will be remembered as Tucci’s defining moment as EMC chieftain.

Now, let’s consider another vendor that had an opportunity to acquire VMware back in 2003.

Massive Market Cap, Industry Dominance

A few years earlier, at the pinnacle of the dot-com boom in March 2000, Cisco was the most valuable company in the world, sporting a market capitalization of more than US$500 billion.  It was a networking colossus that bestrode the globe, dominating its realm of the industry as much as any other technology company during any other period. (Its only peers in that regard were IBM in the mainframe era and Microsoft and Intel in the client-server epoch.)

Although Juniper Networks brought its first router to market in the fall of 1998 and began to challenge Cisco for routing patronage at many carriers early in the first decade of the new millennium, Cisco remained relatively unscathed in enterprise networking, where its Catalyst switches grew into a multibillion-dollar franchise after it saw off competitive challenges in the late 90s from companies such as 3Com, Cabletron, Nortel, and others.

As was its wont since its first acquisition, involving Crescendo Communications in 1993, Cisco remained an active buyer of technology companies. It bought companies to inorganically fortify its technological innovation, and to preclude competitors from gaining footholds among its expanding installed base of customers.

Non-Buyer’s Remorse?

It’s true that the post-boom dot-com bust cooled Cisco’s acquisitive ardor. Nonetheless, the networking giant made nine acquisitions from May 2002 through to the end of 2003. The companies Cisco acquired in that span included Hammerhead Networks, Navarro Networks, AYR Networks, Andiamo Systems, Psionic Software, Okena, SignalWorks, Linksys, and Latitude Communications.

The biggest acquisition in that period involved spin-in play Andiamo Systems, which provided the technological foundation for Cisco’s subsequent push to dominate storage networking. Cisco was at risk of paying as much as $2.5 billion for Andiamo, but the actual price tag for that convoluted spin-in transaction was closer to $750 million by the time it finally closed in 2004. The next-biggest Cisco acquisition during that period involved home-networking vendor Linksys, for which Cisco paid about $500 million.

Cisco announced the acquisitions of Hammerhead Networks and Navarro Networks in a single press release. Hammerhead, for which Cisco exchanged common stock valued at up to $173 million, developed software that accelerated the delivery of IP-based billing, security, and QoS; the company was folded into the Cable Business Unit in Cisco’s Network Edge and Aggregation Routing Group. Navarro Networks, for which Cisco exchanged common stock valued at up to $85 million, designed ASIC components for Ethernet switching.

To acquire AYR Networks, a vendor of “high-performance distributed networking services and highly scalable routing software technologies,” Cisco parted with about $113 million in common stock. AYR’s technology was intended to augment Cisco’s IOS software.

Andiamo Factor

Although the facts probably are familiar to many readers, Cisco’s acquisition of Andiamo was noteworthy for several reasons.  It was a spin-in acquisition, in which Cisco funded the company to go off and develop technology on its own, only later to be brought back in-house through acquisition. Andiamo was led by its CEO Buck Gee, and it included a core group of engineers who also were at Cresendo Communications.  The concept and execution of the spin-in move at Cisco was highly controversial within the company, seen as operationally and strategically innovative by many senior executives even though others claimed it engendered envy, invidious, and resentment among rank-and-file employees.

No matter, Andiamo was meant to provide market leadership for Cisco in the IP-based storage networking and to give Cisco a means of battering Brocade in Fibre Channel. That plan hasn’t come to fruition, with Brocade still leading in a tenacious Fibre Channel market and Cisco banking on Fibre Channel over Ethernet (FCoE) to go from the edge to the core. (The future of storage networking, including the often entertaining Fiber Channel-versus-FCoE debates, are another matter, and not within the purview of this post.)

While we’re on the topic of Andiamo, its former engineers continue to make news. Just this week, former Andiamo engineers Dante Malagrinò and Marco Di Benedetto officially launched Embrane, a company that is committed to delivering a platform for virtualized L4-7 network services at large cloud service providers. Those two gentlemen also were involved in Cisco last big spin-in move, Nuova Systems, which provided the foundation for Cisco’s Unified Computing Systems (UCS).

As for Cisco’s post-Andiamo acquisition announcements in 2002, Okena and Psionic both were involved in intrusion-detection technology. Of the two, Okena represented the larger transaction, valued at about $154 million in stock.

Interestingly, not much is available publicly these days regarding Cisco’s announced acquisition of SignalWorks in March of 2003. If you visit the CrunchBase profile for SignalWorks and click on a link that is supposed to take you to a Cisco press release announcing the deal, you’ll get a “Not Found” message. A search of the Cisco website turns up two press releases — relating to financial results in Cisco’s third and fourth quarters of fiscal year 2003, respectively — that obliquely mention the SignalWorks acquisition. The purchase price of the IP-audio company was about $16 million. CNet also covered the acquisition when it first came to light.

Other Strategic Priorities

Cisco’s last announced acquisitions in that timeframe involved home-networking player Linksys, part of Cisco’s ultimately underachieving bid to become a major player in the consumer space, and web-conferencing vendor Latitude Communications.

And now we get the crux of this post. Cisco announced a number of acquisitions in 2002 and 2003, but it was one they didn’t make that reverberates to this day. It was a watershed acquisition, a strategic masterstroke, but it was made by EMC, not by Cisco. As I said, the implications resound through to this day and probably will continue to ramify for years to come.

Some might contend that Cisco perhaps didn’t grasp the long-term significance of virtualization. Apparently, though, some at Cisco were clamoring for the company to buy VMware.  The missed opportunity wasn’t attributable to Cisco failing to see the importance of virtualization — some at Cisco had the prescience to see where the technology would lead — but because an acquisition of VMware wasn’t considered as high a priority as the spin-in of Andiamo for storage networking and the acquisition of Linksys for home networking.

Cisco placed its bets elsewhere, perhaps thinking that it had more time to develop a coherent and comprehensive strategy for virtualization. Then EMC made its move.

Missed the Big Chance

To this day, in my view, Cisco is paying an exorbitant opportunity cost for failing to take VMware off the market, leaving it for EMC and ultimately allowing the storage leader, yeas later, to gain the upper hand in the Virtual Computing Environment (VCE) Company joint venture that delivers UCS-encompassing VBlocks. There’s a rich irony there, too, when one considers that Cisco’s UCS contribution to the VBlock package is represented by technology derived from spin-in Nuova.

But forget about VCE and VBlocks. What about the bigger picture? Although Cisco likes to talk itself up as a leader in virtualization, it’s not nearly as prominent or dominant as it might have been. Is there anybody who would argue that Cisco, if it had acquired and then integrated and assimilated VMware as half as well as it digested Crescendo, wouldn’t have absolutely thrashed all comers in converged data-center infrastructure and cloud infrastructure?

Cisco belatedly recognized its error of omission, but it was too late. By 2009, EMC was not interested in selling its majority stake in VMware to Cisco, and Cisco was in no position to try to obtain it through an acquisition of EMC. In that regard, Cisco’s position has only worsened.

Although EMC’s ownership stake in VMware amounts to about 80 percent (or perhaps even just north of that amount), its has 98 percent of the voting shares in the company, which effectively means EMC steers the ship, regardless of public pronouncements VMware executives might issue regarding their firm being an autonomous corporate entity.

Keeping Cisco Interested but Contained 

Conversely, Cisco owns approximately five percent of VMware’s Class A shares, but none of its Class B shares, and it held just one percent of voting power as of March 2011.  As of that same date, EMC owned all of VMware’s 330,000,000 Class B Shares and 33,066,050 of its 118,462,369 shares of Class A common shares. Cisco has a stake in VMware, but it’s a small one and it has it at the pleasure of EMC, whose objective is to keep Cisco sufficiently interested so as not to pursue other strategic options in data-center virtualization and cloud infrastructure.

The EMC gambit has worked, up to the point. But Cisco, which missed its big chance  in 2003, has been trying ever since then to reassert its authority. Nuova, and all that flowed from it, was Cisco’s first attempt to regain lost ground, and now it is partnering, to varying degrees, with VMware and EMC competitors such as NetApp, Citrix, and Microsoft. It also has gotten involved involved with OpenStack and the oVirt Project in a bid to hedge its virtualization bets.

Yes, some of those moves are indicative of coopetition, and Cisco retains its occasionally strained VCE joint venture with EMC and VMware, but Cisco clearly is playing for time, looking for a way to redefine the rules of the game.

What Cisco is trying to do is break an impasse of its own making, a result of strategic choices it made nearly a decade ago.

Brocade Engages Qatalyst Again, Hopes for Different Result

The networking industry’s version of Groundhog Day resurfaced late last week when the Wall Street Journal published an article in which “people familiar with the matter” indicated that Brocade Communications Systems was up for sale — again.

Just like last time, investment-banking firm Qatalyst Partners, headed by the indefatigable Frank Quattrone, appears to have been retained as Brocade’s agent. Quattrone and company failed to find a buyer for Brocade last time, and many suspect the same fate will befall the principals this time around.

Changed Circumstances

A few things, however, are different from the last time Brocade was put on the block and Qatalyst beat Silicon Valley’s bushes seeking prospective buyers. For one thing, Brocade is worth less now than it was back then. The company’s shares are worth roughly half as much as they were worth during fevered speculation about its possible acquisition back in the early fall of 2009. With a current market capitalization of about $2.15 billion, Brocade would be easier for a buyer to digest these days.

That said, the business case for Brocade acquisition doesn’t seem as compelling now as it was then. The core of its commercial existence, still its Fibre Channel product portfolio, is well on its way to becoming a slow-growth legacy business. What’s worse, it has not become a major player in Ethernet switching subsequent to its $3 billion purchase of Foundry Networks in 2008. Running the numbers, prospective buyers would be disinclined to pay much of a premium for Brocade today unless they held considerable faith in the company’s cloud-networking vision and strategy, which isn’t at all bad but isn’t assured to succeed.

Unfortunately, another change is that fewer prospective buyers would seem to be in the market for Brocade these days. Back in 2009, Dell, HP, Oracle, IBM all were mentioned as possible acquirers of the company. One would be hard pressed to devise a plausible argument for any of those vendors to make a play for Brocade now.

Dell is busily and happily assimilating and integrating Force10 Networks; HP is still trying to get its networking house in order and doesn’t need the headaches and overlaps an acquisition of Brocade would entail; IBM is content to stand pat for now with its BLADE Network Technologies acquisition; and, as for Oracle, Larry Ellison was adamant that he wanted no part of Brocade. Admittedly, Ellison is known for his shrewdness and occasional reverses, but he sured seemed convincing regarding Oracle’s position on Brocade.

Sorting Out the Remaining Candidates

So, that leaves, well, who exactly? Some believe Cisco might buy up Brocade as a consolidation play, but that seems only a remote possibility. Others see Juniper Networks similarly making a consolidation play for Brocade. It could happen, I suppose, but I don’t think Juniper needs a distraction of that scale just as it is reaching several strategic crossroads (delivery of product roadmap, changing industry dynamics, technological shifts in its telco and service-provider markets). No, that just wouldn’t seem a prudent move, with the risks significantly outweighing the potential rewards.

Some say that private-equity players, some still flush with copious cash in their coffers, might buy Brocade. They have the means and the opportunity, but is the motive sufficient? It all comes back to believing that Brocade is on a strategic path that will make it more valuable in the future than it is today. In that regard, the company’s recent past performance, from a valuation standpoint, is not encouraging.

A far-out possibility, one that I would classify as remotely unlikely, envisions EMC buying Brocade. That would signal an abrupt end to the Cisco-EMC partnership, and I don’t see a divorce, were it to transpire, occurring quite so suddenly or irrevocably.

I do, however, see one dark-horse vendor that could make a play for Brocade, and might already have done so.

Could it Be . . . Hitachi?

That vendor? It’s Hitachi Data Systems. Yes, you’re probably wondering whether I’ve partaken of some pre-Halloween magic mushrooms, but I’ve made at least a half-way credible case for a Hitachi acquisition of Brocade previously. With its well-hidden Unified Compute Platform (UCP), Hitachi has aspirations to compete against Cisco, HP, Dell and others in converged data-center infrastructure. Hitachi owns 60 percent of a networking joint venture, with NEC as the junior partner, called Alaxala. If you go to the Alaxala website, you’ll see the joint venture’s current networking portfolio, which is bereft of Fibre Channel switches.

The question is, does Hitachi want them? Today, as indicated on the Hitachi website, the company partners with Brocade, Cisco, Emulex (adapters), and QLogic (adapters) for Fibre Channel networking and with Brocade and QLogic (adapters) for iSCSI networking.

The last time Brocade was said to the market, the anticlimactic outcome left figurative egg on the faces of Brocade directors and on those of the investment bankers at Qatalyst, which has achieved a relatively good batting average as a sales agent. Let’s assume — and, believe me, it’s a safe assumption — that media leaks about potential acquisitions typically are carefully contrived occurrences, done either to make a market or to expand a market in which there’s a single bidder that has declared intent and made an offer. In the latter case, the leak is made to solicit a competitive bid and drive up value.

Hold the Egg this Time

I’m not sure what transpired the first time Qatalyst was contracted to find a buyer for Brocade. The only sure inference is that the result (or lack thereof) was not part of the plan. Giving both parties the benefit of the doubt, one would think lessons were learned and they would not want to perform a reprise of the previous script. So, while perhaps last time there wasn’t a bidder or the bidder withdrew its offer after the media leak was made, I think there’s a prospective buyer firmly at the table this time. I also think Brocade wants to see whether a better offer can be had.

My educated guess, with the usual riders and qualifications in effect,* is that perhaps Hitachi or a private-equity concern (Silver Lake, maybe) is at the table. With the leak, Brocade and Qatalyst are playing for time and leverage.

We’ll see, perhaps sooner rather than later.

* I could, alas, be wrong.

OVA Members Hope to Close Ground

I discussed the fast-growing Open Virtualization Alliance (OVA) in a recent post about its primary objective, which is to commoditize VMware’s daunting market advantage. In catching up on my reading, I came across an excellent piece by InformationWeek’s Charles Babcock that puts the emergence of OVA into historical perspective.

As Babcock writes, the KVM-centric OVA might not have come into existence at all if an earlier alliance supporting another open-source hypervisor hadn’t foundered first. Quoting Babcock regarding OVA’s vanguard members:

Hewlett-Packard, IBM, Intel, AMD, Red Hat, SUSE, BMC, and CA Technologies are examples of the muscle supporting the alliance. As a matter of fact, the first five used to be big backers of the open source Xen hypervisor and Xen development project. Throw in the fact Novell was an early backer of Xen as the owner of SUSE, and you have six of the same suspects. What happened to support for Xen? For one, the company behind the project, XenSource, got acquired by Citrix. That took Xen out of the strictly open source camp and moved it several steps closer to the Microsoft camp, since Citrix and Microsoft have been close partners for over 20 years.

Xen is still open source code, but its backers found reasons (faster than you can say vMotion) to move on. The Open Virtualization Alliance still shares one thing in common with the Xen open source project. Both groups wish to slow VMware’s rapid advance.

Wary Eyes

Indeed, that is the goal. Most of the industry, with the notable exception of VMware’s parent EMC, is casting a wary eye at the virtualization juggernaut, wondering how far and wide its ambitions will extend and how they will impact the market.

As Babcock points out, however, by moving in mid race from one hypervisor horse (Xen) to another (KVM), the big backers of open-source virtualization might have surrendered insurmountable ground to VMware, and perhaps even to Microsoft. Much will depend on whether VMware abuses its market dominance, and whether Microsoft is successful with its mid-market virtualization push into its still-considerable Windows installed base.

Long Way to Go

Last but perhaps not least, KVM and the Open Virtualization Alliance (OVA) will have a say in the outcome. If OVA members wish to succeed, they’ll not only have to work exceptionally hard, but they’ll also have to work closely together.

Coming from behind is never easy, and, as Babcock contends, just trying to ride Linux’s coattails will not be enough. KVM will have to continue to define its own value proposition, and it will need all the marketing and technological support its marquee backers can deliver. One area of particular importance is operations management in the data center.

KVM’s market share, as reported by Gartner earlier this year, was less than one percent in server virtualization. It has a long way to go before it causes VMware’s executives any sleepless nights. That it wasn’t the first choice of its proponents, and that it has lost so much time and ground, doesn’t help the cause.

Further Intimations of Cisco-EMC Tensions

At the risk of further ad-hominem attacks, I will note again that all might not be well with the relationship between Cisco and EMC, particularly within the context of their VCE joint venture.

I suggested previously that Cisco and EMC might be heading for a not-so-amicable divorce, and I still feel that the organizational and technological auguries point in that direction. The signs at VCE — which provides converged infrastructure comprising Cisco servers and switches, EMC storage, and VMware virtualization — have been inauspicious lately, with layoffs, significant restructuring, and Cisco’s increasingly ardent converged-infrastructure partnership with EMC competitor NetApp adding murk to the mix.

Capellas Loses CEO Title

Now, there’s more to consider. A few weeks ago, as reported by The Register, Michael Capellas was delisted as VCE’s CEO on the company’s website. Capellas is a Cisco board member who was strongly backed by John Chambers for the CEO position at VCE.  The official story from VCE is that nothing has changed at VCE, that Capellas’ role remains the same even though he’s lost the CEO designation and now shares the responsibility of running the company with Frank Hauck, a longtime EMC executive who was appointed VCE president earlier this year.

Perhaps VCE’s official spin on the mahogany-row shuffle is true, but skepticism seems warranted.

In the same piece at The Register that updates us on Capellas’ current status at VCE, we also learn that a source formerly employed by the joint venture says “the Cisco originator of the Vblock concept  is no longer at VCE and neither is the Cisco staffer who ran VCE’s service provider and channel sales operation.”

Mere coincidence, one might contend, and I’m inclined to take that possibility under advisement.

EMC in Server Business?

There’s one other piece of evidence to consider, though. As reported by The Register (yes, again), EMC seems to have moved, via its storage arrays, into the server business. That, as you might expect, could have implications for EMC’s relationship with Cisco and its Unified Computing System (UCS) servers.

Here’s a particularly salient excerpt from The Register article, written by Chris Mellor:

“If you have a VMAX, with flash-enhanced engines, able to run application software, then you wouldn’t need UCS servers to do that job. Were EMC to do a deal with a network supplier, then you wouldn’t need Cisco network switches to hook the application server/array complex up to accessing clients either, and we might have a VMAXblock as well as a Vblock.”

For its part, EMC is ambiguous on whether it’s actually entering the server space. On his blog, EMC staffer Mark Twomey has enjoyed some mischievous fun with the proposition, concluding that EMC’s moves put in the compute and systems business and “maybe” in the server business.

Such fine distinctions might be lost on server vendors such as HP, Dell, and IBM.

Follow the Money

Let’s remember that EMC is the overwhelming majority shareholder — and, thus, owner — of VMware. As such, the virtualization leader will not do anything to hurt the business prospects of its de facto parent. More to the point, VMware remains in the strategic service of EMC, furthering its big-picture agenda while advancing its own interests.

That combination isn’t just a competitive threat to the likes of HP, IBM, and Dell. Increasingly — indirectly or otherwise — Cisco seems to be in EMC-VMware gunsights, too.

Will Cisco Leave VCE Marriage of Convenience?

Because I am in a generous mood, I will use this post to provide heaping helpings of rumor and speculation, a pairing that can lead to nowhere or to valuable insights. Unfortunately, the tandem usually takes us to the former more than the latter, but let’s see whether we can beat the odds.

The topic today is the Virtual Computing Environment (VCE) Company, a joint venture formed by Cisco and EMC, with investments from VMware and Intel.  VCE is intended to accelerate the adoption of converged infrastructure, reducing customer costs related to IT deployment and management while also expediting customers’ time to revenue.

VCE provides fully assembled and tested Vblocks, integrated platforms that include Cisco’s UCS servers and Nexus switches, EMC’s storage, and VMware’s virtualization. Integration services and management software are provided by VCE, which considers the orchestration layer as the piece de resistance.

VCE Layoffs?

As a company, VCE was formed at the beginning of this year. Before then, it existed as a “coalition” of vendors providing reference architectures in conjunction with a professional-services operation called Acadia. Wikibon’s Stuart Miniman provided a commendable summary of the evolution of VCE in January.

If you look at official pronouncements from EMC and — to a lesser extent — Cisco, you might think that all is well behind the corporate facade of VME. After all, sales are up, the business continues to ramp, the value proposition is cogent, and the dour macroeconomic picture would seem to argue for further adoption of solutions, such as VME, that have the potential to deliver reductions in capital and operating expenditures.

What, then, are we to make of rumored layoffs at VCE? Nobody from Cisco or EMC has confirmed the rumors, but the scuttlebutt has been coming steadily enough to suggest that there’s fire behind the smoke. If there’s substance to the rumors, what might have started the fire?

Second Thoughts for Cisco?

Well, now that I’ve given you the rumor, I’ll give you some speculation. It could be — and you’ll notice that I’ve already qualified my position — that Cisco is having second thoughts about VCE. EMC contributes more than Cisco does to VCE and its ownership stake is commensurately greater, as Miniman explains in a post today at Wikibon:

 “According to company 10Q forms, Cisco (May ’11) owns approximately 35% outstanding equity of VCE with $100M invested and EMC (Aug ’11) owns approximately 58% outstanding equity of VCE with $173.5M invested. The companies are not disclosing revenue of the venture, except that it passed $100M in revenue in about 6 months and as of December 2010 had 65 “major customers” and was growing that number rapidly. In July 2011, EMC reported that VCE YTD revenue had surpassed all of 2010 revenue and CEO Joe Tucci stated that the companies “expect Vblock sales to hit the $1 billion run rate mark in a next several quarters.” EMC sees the VCE investment as strategic to increasing its importance (and revenue) in a changing IT landscape.”

Indeed, I agree that EMC views its VCE acquisition through a strategic prism. What I wonder about is Cisco’s long-term commitment to VCE.

Marriage of Convenience

There already have been rumblings that Cisco isn’t pleased with its cut of VCE profits. In this context, it’s important to remember how VCE is structured. The revenue it generates flows directly to its parent companies; it doesn’t keep any of it.  Thus, VCE is built purely as a convenient integration and delivery vehicle, not as a standalone business that will pursue its own exit strategy.

Relationships of convenience, such as the one that spawned VCE, often do not prove particularly durable. As long as the interests of the constituent partners remain aligned, VCE will remain unchanged. If interests diverge, though, as they might be doing now, all bets are off. When the convenient becomes inconvenient for one or more of the partners, it’s over.

It’s salient to me that Cisco is playing second fiddle to EMC in VCE. In its glory days, Cisco didn’t play second fiddle to anybody.

In the not-too-distant past, Cisco CEO John Chambers had the run of the corporate house. Nobody questioned his strategic acuity, and he and his team were allowed to do as they pleased. Since then, the composition of his team has changed — many of Cisco’s top executives of just a few short years ago are no longer with the company — and several notable investors and analysts, and perhaps one or two board members, have begun to wonder whether Chambers can author the prescription that will cure Cisco’s ills. Doubts creep into the minds of investors after a decade of stock stagnancy, reduced growth horizons, a failed foray into consumer markets, and slow but steady market-share erosion.

Alternatives to Playing Second Fiddle

Meanwhile, Cisco has another storage partner, NetApp. The two companies also have combined to deliver converged infrastructure. Cisco says the relationships involving VCE’s Vblocks and NetApp’s FlexPods don’t see much channel conflict and that they both work to increase Cisco’s UCS  footprint.

That’s likely true. It’s also likely that Cisco will never control VCE. EMC holds the upper hand now, and that probably won’t change.

Once upon a time, Cisco might have been able to change that dynamic. Back then, it could have acquired EMC. Now, though? I wouldn’t bet on it . EMC’s market capitalization is up to nearly $48 billion and Cisco’s stands at less than $88 billion. Even if Cisco repatriated all of its offshore cash hoard, that money still wouldn’t be enough to buy EMC. In fact, when one considers the premium that would have to be paid in such a deal, Cisco would fall well short of the mark. It would have to do a cash-and-stock deal, and that would go over like the Hindenburg with EMC shareholders.

So, if Cisco is to get more profit from sales of converged infrastructure, it has to explore other options. NetApp is definitely one, and some logic behind a potential acquisition was explored earlier this year in a piece by Derrick Harris at GigaOm. In that post, Harris also posited that Cisco consider an acquisition of Citrix, primarily for its virtualization technologies. If Cisco acquired NetApp and Citrix, it would be able to offer a complete set of converged infrastructure, without the assistance of EMC or its majority-owned VMware. It’s just the sort of bold move that might put Chambers back in the good graces of investors and analysts.

Irreconcilable Differences 

Could it be done? The math seems plausible. Before it announced its latest quarterly results, Cisco had $43.4 billion in cash, 89 percent of which was overseas. Supposing that Cisco could repatriate its foreign cash hoard without taking too much of a tax hit — Cisco and others are campaigning hard for a repatriation tax holiday — Cisco would be in position to make all-cash acquisitions for Citrix (with a $11.5 billion market capitalization) and NetApp (with a $16.4 market capitalization). Even with premiums factored into the equation, the deals could be done overwhelmingly, if not exclusively, with cash.

I know the above scenario is not without risk to Cisco. But I also know that the status quo isn’t going to get Cisco to where it needs to be in converged infrastructure. Something has to give. The VCE open marriage of convenience could be destined to founder on the rocks of irreconcilable differences.

Cisco to Cut Staff; EMC Speculation Vanishes

Gleacher & Co. analyst Brian Marshall drew some notice earlier today when he wrote that Cisco could slash as many as 5,000 positions, about seven percent of its workforce, next month. Marshall estimated that the cull “could incrementally reduce Cisco’s pro forma operating expenses by about $1 billion annually.”

Cisco Confirms Cuts

Marshall said the estimates were his own, based on what he believed Cisco needs to do to meet its meet its $1-billion objective for reduced annual expenses. Cisco later confirmed that job cuts are coming in August, though it did not indicate how many employees would be affected. Previously, Cisco had been encouraging employees to take early-retirement packages.

At the same time he made his projections about how many workers Cisco might need to jettison, Marshall also speculated that Cisco should seek a “transformative merger” with EMC. On that theme, Marshall apparently opined that a combination with EMC would give Cisco “better exposure to enterprise storage trends, ownership of the VMware asset for virtualization, a more robust security offering and a better collection of IT service professionals.”

I included the qualifier “apparently” in the preceding sentence because it seems Bloomberg and BusinessWeek, which both earlier today published a report including references to Marshall’s musings regarding a Cisco takeout of EMC, have excised any mention of EMC from subsequent iterations of the coverage.

Marshall’s M&A Advice Disappears

It’s hard to tell what that means, if anything. All I know is that the earliest version of the story included reference to Marshall’s advice that Cisco buy EMC, and later iterations of the story made no mention of EMC. It’s odd, but strange things happen when news is published in realtime.

Presuming I did not hallucinate — and a report by Jim Duffy over at NetworkWorld suggests I did not — what are we to make of Marshall’s recommendation? Well, it wouldn’t the first time somebody has suggested that Cisco acquire EMC, and it probably won’t be the last. The conjecture or rumor (or whatever else you want to call it) has had more comebacks than Brett Favre. It’s an old chestnut that gets repeated plays on analysts’ virtual jukeboxes.

Given its current valuation, though, EMC probably isn’t going anywhere. At the conclusion of stock-market trading today, EMC had a market capitalization of more than $56.1 billion, whereas Cisco had a market capitalization of $84.8 billion. Cisco has made a few sizable acquisitions in its time — though it established its wheeler-dealer bones on smaller, bite-size technology buys — but it never has done a deal on the gargantuan scale that would be required to land EMC.

Cisco’s Repatriation Holiday

What’s more, Cisco still has most of its cash overseas, It’s lobbying the U.S. government assiduously for a repatriation tax holiday, but that break hans’t been accorded yet. Even if Cisco were desperate enough to abandon its old acquisition playbook and splash out obscene amounts of cash and stock for EMC — and, for the record, I think Cisco is teetering on the cusp of becoming seriously desperate — it is not in a position to make the move until its overseas cash hoard (of approximately $31.6 billion) has been repatriated.

Even then, does EMC want to sell? Like every other vendor out there, EMC faces daunting challenges as the ascent of cloud computing realigns the data-center landscape. Still, one could make a compelling case that EMC, with its storage leadership and its 80-percent-plus ownership of VMware, is better placed than most vendors, including Cisco, to survive and even thrive in that brave new world. Does it really want to take Cisco stock — any deal would have to involve Cisco shares as well as cash — as part of a potential transaction? I don’t see it happening.

Dividing the Spoils

Cisco might have concerns regarding its share of the spoils from its Virtual Computing Environment (VCE) joint venture with EMC, which perhaps partly explains why it has partnered increasingly aggressively with NetApp on the FlexPod converged infrastructure architecture. Nonetheless, Cisco isn’t in a position to buy EMC, and EMC isn’t willing to part with its majority-owned VMware, so even a more modest deal is off the table.

Could Cisco buy NetApp? It could, but such a move would entail a different set of consequences, risks, and rewards, all of which we will save for another post.

Dell: Brocade and CommVault Rumors Redux

 
Dell is sitting on more than $15 billion in cash and investments, and we should expect that the diversifying computer mainstay will tap that money in pursuit of further acquisitions in 2011.

Brocade: A Reasonable Target for Dell

I have heard repeatedly that Dell wants to make a networking acquisition. The most logical target, given Dell’s increased storage profile in recent years, is Brocade Communications. Dell already resells Brocade’s Fiber Channel SAN switches, and Brocade’s technology plays well with Dell’s earlier acquisition of Compellent Technologies. An acquisition of Brocade would boost Dell’s margins, allowing it to become a vendor, rather than a reseller, of SAN switches.

There’s considerable logic supporting a Dell acquisition of Brocade, but there are some reasons to think it won’t happen, too. Brocade has a current market capitalization of about $3.15 billion, and it’s not unthinkable Dell would have to offer at least $4 billion to seal a deal.

Big Deal, Big Risks

The larger the deal, the bigger the risk that integration and assimilation won’t go smoothly. Dell would prefer smaller, digestible deals, and Brocade could result in acquisitive indigestion. Additionally, even though there’s technological logic underlying a potential Dell bid for Brocade, the market and channel profiles of the two companies are not perfectly aligned and could result in post-merger complications.

Furthermore, recent indications within Brocade suggest a sale of the company isn’t necessarily imminent. Its now-former CFO, Richard Deranleau, left the company recently to “pursue other interests.”  Seemingly knowledgeable observers believe Deranleau would have stuck around if a deal for the company had been in the works.

Let’s also remember that Brocade isn’t exactly a new focus of takeout rumors. Every few months, if not more frequently, Brocade is said to be on the block or on the cusp of an impending acquisition. Those deals did not develop, and it’s possible the latest flurry of Dell rumors will fall into the same uneventful bucket.

OEM Entanglements

One reason Brocade might have remained on the shelf, to speak, might involve the nature of its OEM agreements with vendors that include not only Dell but also IBM, HP, EMC, Oracle, Hitachi, Fujitsu, among others. It’s top three OEM resellers — HP, IBM, and EMC — account for about half the company’s revenue.

It’s reasonable to assume that those companies might have included language in their OEM contracts with Brocade that protect themselves and their customers from potentially injurious consequences resulting from Brocade being merged with or acquired by another vendor. Citi analyst John Slack is among those who have contended that Brocade’s existing OEM agreements might cause difficulties for a buyer of the company.

That said, as mentioned above, Brocade would be a reasonable addition to Dell’s storage-centric strategic buildout. It makes sense technologically, and could happen, but that doesn’t mean it will.

CommVault Rumors Return

Meanwhile, CommVault has been perennially rumored to be a Dell acquisition target. Again, it’s a plausible scenario. Dell is a major reseller of CommVault’s Simpana data-management software, accounting for 23 percent of the company’s revenue. Just as in the case of Brocade, Dell could improve its margins significantly by directly selling those products to its channel partners and customers rather than functioning as a reseller.

But the rumor about Dell acquiring CommVault has circulated, quite literally, for years. If Dell wanted to lock up CommVault, it could have done so before now, at a price more favorable than CommVault’s current market capitalization of more than $2 billion. (And, in any deal that might transpire, CommVault would negotiate a significant premium over its current market cap.)

Unless, of course, CommVault wasn’t open to acquisition proposals. Some contend CommVault will be even less amenable to acquisition now that it has struck a potentially lucrative OEM deal with NetApp. If Dell finally wishes to consummate a deal with CommVault, it might be forced to pay a relatively hefty price.