What Dell Could Gain by Acquiring Brocade


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There are rumors that Dell ( DELL ) could look to acquire Brocade Communications Systems ( BRCD ), one of the leading suppliers of data center networking products, in an attempt to expand presence in servers, storage and networking space and better compete with other industry giants like EMC ( EMC ), Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM). This move would be in line with Dell's strategy of diversifying its product and services portfolio and moving further from its core PC business where the firm has been bleeding market share for the past couple of years.

The rumor has been fueled by Dell's recent filing for shelf offering of $3.5 billion as the acquisition would require that Dell shell out as much as $4 billion or even more for Brocade, which is currently valued at $3.7 billion.

The addition of this business would complement Dell's existing servers & networking business that accounts for about 14% of the $20 Trefis price estimate for Dell , which is about 25-30% above the stock's market price.

Brocade's SAN Switching Market Leadership….

Brocade makes fibre channel switches and related software for connecting corporate storage systems and servers. Brocade's products are used in storage area networks (SANs), which pool storage resources across enterprises for easier management and efficient asset utilization.

Brocade holds more than 70% of storage area network ( SAN ) switching market and has presence in about 80% of data centers worldwide, an area where Dell has been pressing hard to gain prominence as it makes a shift to cater to the enterprise market. (See Dell Targets High Growth Storage Market )

Provides Cross Selling Opportunities to Dell

Brocade's large storage switching installed base will allow Dell access to more data center accounts providing significant opportunity for cross selling servers, storage and services.

We currently forecast Dell's networking revenues to increase from an estimated $1.2 billion in 2010 to over $1.6 billion by the end of our forecast period. This could change significantly if Dell acquires Brocade - which had over $2 billion in revenues in 2010. Also if Dell is able to push its server sales as a result of the acquisition, it will make the servers & networking business segment more valuable than the PC business (notebooks, netbooks & desktops combined) for Dell.

Integration Could be Tricky

In the past, Dell has acquired high growth companies with innovative technologies but limited reach due to their size, and then Dell benefit from using its distribution capabilities. We note that the Brocade acquisition, if completed, would mark a shift in this strategy. Brocade has a large presence among data centers to sell its own products and its integration could be one area of difficulty for Dell.

While an ambitious deal, it will be interesting to see whether the acquisition helps Dell grow or leaves it at strategic cross-roads.

See our full analysis of Dell .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
More Headlines for: BRCD , DELL , EMC , SAN

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