Brocade Buying McData

McData warns as Brocade guides higher.
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Brocade (BRCD) agreed to acquire McData (MCDTA) for $713 million in stock in a pairing of struggling data storage players.

San Jose, Calif.-based Brocade said its shareholders will end up holding 70% of the combined company's stock. The deal, which is to be tax-free to holders of Broomfield, Colo.-based McData, will have McData holders getting 0.75 Brocade share for each McData share owned. Shares in both companies have lost more than 80% of their value since a recent peak in January 2002.

"Today marks an important milestone in Brocade's continued success as a strategic provider to the enterprise customer," said Brocade chief Michael Klayko. "This combination will accelerate the pace of innovation, enable us to build stronger relationships with our customers and partners, and provide greater scale and efficiencies to accelerate our growth. We believe this is a strategic combination that will benefit our customers and create value for our combined stockholders."

Brocade said the deal will be accretive on a pro forma basis by the fourth quarter.

Following the closing, Brocade's executive management team will continue to serve in their current roles. John Kelley, McData CEO, will serve as an adviser to Brocade. Brocade will retain its name and corporate headquarters in San Jose, California, and two McData directors will join the board.

Brocade also guided higher for the fiscal third quarter ended July 29. The company expects to make 8 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.

McData, on the other hand, guided down, saying it expects to post a loss of up to 2 cents a share on revenue of $151 million or so. Analysts were looking for a nickel-a-share profit on sales of $175 million.

"During the second quarter we experienced weakness in EMEA as well as certain regions within North America," said Kelley. "Additionally, overall enterprise demand was down with some of our high end products. We have already begun to implement changes within these geographies to increase revenues by focusing on our complete product portfolio. These opportunities should be enhanced with the launch of the 4 Gb/s capability that will be available on the McDATA 10000 (i10K) in our third fiscal quarter. We will build on our continued growth in the Asia Pacific Region as well as several performing regions in the United States. While we are disappointed we missed our original guidance, customer feedback is positive for McData's vision and solutions offerings."