Brocade Communications Systems Inc., dominant in an obscure corner of the data storage market, wants a piece of a bigger pie: Cisco Systems Inc.’s cash cow business of networking equipment that shuttles Internet traffic.
San Jose-based Brocade said Monday it has agreed to pay $3 billion to acquire one of Cisco’s much-smaller competitors, Foundry Networks Inc., to try and make that happen.
The proposed acquisition would meld two companies with presence deep in the data center and pose a direct challenge to Cisco, which at $29 billion in annual sales is the world’s leader in Internet networking equipment.
Surging Internet traffic, especially in bandwidth-hogging video, has driven intense demand for the routers and switches that direct Internet traffic, Cisco’s home turf. That’s also lifted the fortunes of Cisco’s smaller rivals, including Santa Clara-based Foundry Networks, which specializes in high-end networking gear, making them attractive takeover targets.
Brocade wants Foundry Networks because Brocade’s primary business — it’s dominant in a type of switch that connects servers to data storage machines — is under pressure. Data centers are changing, and networking companies are eyeing acquisitions or expensive R&D efforts to come up with technologies that make the servers, storage and related equipment more robust and easier to manage.
The acquisition promises to make Brocade a more well-rounded competitor to Cisco, but isn’t likely to substantially dent Cisco’s dominance because Foundry Networks, with $607 million in sales last year, is considered a niche player.
Foundry owned just 2 percent of the market for Ethernet switches in 2007, while Cisco had 71 percent, a huge lead in supplying essential networking gear, according to data from the Dell’Oro Group research firm.
Alan Weckel, a senior analyst with Dell’Oro, said competitive pressures probably drove Brocade into pursuing Foundry Networks, since Cisco is pushing a convergence of technologies that threatened Brocade’s business.
Brocade specializes in…