Cisco Looms Large in Brocade/McData Deal
08/08/06 - 03:54 PM EDT
Bill Snyder
Size matters.
Four years after networking giant Cisco(CSCO Quote - Cramer on CSCO - Stock Picks) began selling storage switches, the two leading players in that market have banded together for survival. Brocade Communications(BRCD Quote - Cramer on BRCD - Stock Picks) will buy rival McData(MCDTA Quote - Cramer on MCDTA - Stock Picks) in a $713 million all-stock deal, the companies announced before Tuesday's opening bell. The news sent shares of the two companies racing in opposite directions. In recent trading, shares of McData were up 37 cents, or nearly 12% to $3.48, while Brocade was off $1.19, or 19%, to $4.95. Volume was very heavy on both issues. McData's weakness was underscored by the other part of Tuesday's announcement -- that it won't meet its fourth-quarter targets. McData now expects to post earnings ranging from a loss of 2 cents a share to break-even on sales of $150 million to $152 million. Wall Street was looking for a 5-cent a share profit on sales of $176 million. Brocade, though, guided higher for its fiscal third quarter ended July 29. The company expects to make 8 cents or 9 cents a share on revenue of $188 million or $189 million. Analysts surveyed by Thomson Financial were looking for a 7-cent profit on sales of $180 million. The merger announcement wasn't unexpected. Indeed, rumors that one company or the other would buy out its rival have persisted for years, sometimes with McData as the acquirer, sometimes Brocade, depending on which company was stronger at the time, said Goldman Sachs analyst Laura Conigliaro. Combined, the two companies will represent roughly 70% of the market. Cisco and its partner QLogic(QLGC Quote - Cramer on QLGC - Stock Picks) will also benefit, as some manufacturers shift business their way to have at least two suppliers for key products, said Baird analyst Daniel J. Renouard. Goldman Sachs has an investment banking relationship with McData, but not Brocade. Baird does not have an investment banking relationship with either.
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