With Cisco in Crosshairs, Here's Why EMC May Try to Buy Brocade

When Joe Tucci, the CEO of the storage and IT company EMC, addressed a meeting of analysts in New York last month, he sent a pretty strong signal that his company is thinking long and hard about acquisitions, perhaps even some big ones.

There are, Tucci said, “a tremendous number of consolidation opportunities” for EMC that would be “accretive quite quickly.” The comment triggered speculation about who EMC might buy, with networking company Brocade at the top of the list.

Here are a few reasons why EMC may be interested in buying Brocade.

EMC has a growing rivalry with networking giant Cisco Systems in an expanding new market for data center equipment that comes with a very unsexy name: Converged infrastructure.

The phrase refers to IT hardware products that combine computing, storage, networking and software into a single unified product, whereas traditionally they’ve been sold separately and stitched together.

EMC and Cisco are starting to compete a lot more in selling converged infrastructure products, but there’s one thing that EMC lacks: Networking. Brocade has a $2.2 billion annual business selling networking equipment and would potentially fit nicely with EMC’s converged infrastructure products. Plus they’ve been partners for a long time and share some 50,000 joint customers.

Cisco sells its own converged infrastructure product, called the Unified Computing System, which it said is on track to bring in $3 billion in sales this year.

EMC and Cisco had been partners in a joint venture called VCE, which sells — you guessed it — converged infrastructure. Cisco’s part had been to furnish network switching gear for several VCE products.

The partnership frayed and then came apart after VMware — the software company that is majority owned by EMC — acquired the networking startup Nicira. The move annoyed Cisco because it meant that VMware intended to compete against it someday. EMC bought out Cisco’s stake in VCE earlier this year. EMC turned VCE into a subsidiary, and while it’s a key piece of its converged infrastructure play, and still relies on Cisco for the crucial networking bits, EMC would very much like its own.*

In Brocade, EMC would also be buying Cisco’s closest competitor in data center networking. The research firm IDC routinely ranks it second behind Cisco in the market.

EMC has $8.3 billion in combined cash and short-term investments on its balance sheet and could also tap debt as well as cash from VMware. Brocade has been trading at a market valuation of about $5 billion and would, given a reasonable premium, sell for somewhere close to $7 billion. That’s in line with last month’s acquisition by Hewlett-Packard of Aruba Networks, an enterprise networking gear company, for which HP paid a 35 percent premium.

Tucci is thought to be readying EMC for some significant strategic moves as he angles for a way to craft a successful-looking retirement, one he has already put off at least twice. He’s under pressure to boost EMC’s earnings. In a March 19 note, analyst Toni Sacconaghi of Bernstein Research estimated that an acquisition of Brocade would add about 15 cents a share to EMC’s annual bottom line.

Spokespeople for EMC and Brocade both declined to comment.

*Clarification: VCE still uses Cisco in some products, and the story has been revised to clarify that.

This article originally appeared on Recode.net.

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