8/14/2006 -- Dog days of summer or no, strange things were afoot last week in the Fibre Channel switching segment when Brocade Communications Systems Inc. acquired long-time rival McData Corp. for $713 million.

The two companies have a history of often bitter competition, analysts say, but a rapidly changing market helped broker a peace of sorts -- with McData gracefully acquiescing to Brocade's takeover overture, and both companies pointing to synergies that they claim will help offset not insignificant drawbacks in terms of divergent corporate cultures and promiscuous product overlap.

Analysts say the acquisition is as potentially disruptive as Cisco Systems Inc.'s plunge into the Fibre Channel switching space several years ago.

"Brocade's purchase of McData has shaken up the normally staid and stolid Fibre Channel switching market in a manner we have not seen since Cisco entered the market several years ago," writes Steven Schuchart, a senior analyst for enterprise infrastructure with consultancy Current Analysis.

At the same time, Schuchart stresses, Brocade's move is also far more confusing than Cisco's storied Fibre Channel debut. "[W]e are left scratching our heads as to the reason why Brocade would purchase its faltering long-time rival when its own fortunes are looking up. The synergies generated by the union of these companies fall far short of the price tag and expectation Brocade has set," he argues, noting -- among other examples -- the enormous degree of overlap between the two companies' product lines and installed bases. "Brocade and McData match each other at almost every point: fixed-configuration Fibre Channel switching, director-class switching, services, customers and OSMs."

In this respect, Schuchart cautions, customers will almost certainly get the short end of the stick. "Consolidation of their respective product lines is inevitable, and that will make many customers unhappy. Fibre Channel switches are purchased primarily through OSMs, such as EMC, Hitachi, IBM, HP and Sun," he comments. "Customers run homogeneous Fibre Channel networks because of interoperability issues and are often strident in their loyalty to that vendor. Brocade is going to have to make some very tough choices."

For example, Schuchart says, Brocade's fixed-configuration switches are the market leaders -- but McData's Spherion line of fixed switches has also been successful. McDATA, for its part, has had a lot of success with its director-class products, although issues with its i10k and the transition to 4GB Fibre Channel have bedeviled it in recent months. Because of overlap between its own successful product lines and those of McData, in these segments and others, Brocade is going to have to decide which products to keep -- and which to kill. And that will create opportunities for avaricious competitors like Cisco.

"When Brocade makes 'keep or kill' product line decisions, it is going to open the door for Cisco and QLogic. The success of the combined business will not be measured by whether Brocade hits its promised numbers four quarters after the acquisition finalizes, but rather how the company is doing in two to three years, when customers make major purchasing decisions to upgrade their Fibre Channel networks," Schuchart argues.

So why did Brocade pull the trigger on the acquisition in the first place? Company officials outlined a four-pronged strategy, keying on increased Fibre Channel compatibility, future products based on combined synergies, a faster to-market (by combining engineering staffs), and increased operational efficiency. Schuchart doesn't buy it, though. "Brocade and McData have held a majority of the Fibre Channel switching market between them for years and failed to achieve significant seamless switch interoperability, not due to real technical issues, but due to an unwillingness to give the keys to customers that are locked into one vendor. If the plans for interoperability only include Brocade and McData products and exclude QLogic and Cisco, then Brocade's interoperability strategy has not functionally changed and it is still seeking customer lock-in," he notes.

Schuchart does cut the companies some slack on the R&D front, where he says Brocade will be able to benefit to create a single management framework for its own and McData's products.

"This is one of Brocade's solid points in this acquisition, provided it can keep the expected brain drain in engineering to a minimum. The larger R&D areas can also ensure that Brocade can bring its products to market much quicker and react much faster. Brocade's own internal programs for operational efficiency have done much to improve the company's bottom line and they will no doubt help bring McData's cost infrastructure in line," he comments. -Stephen Swoyer