McData acquired by rival Brocade

Deal for Broomfield tech company valued at $713 million

Roger Fillion, Rocky Mountain News

Published August 9, 2006 at midnight

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McData Corp., the last big player in Colorado's storied data-storage industry, agreed to be sold to larger rival Brocade Communications Systems Inc. of Silicon Valley for about $713 million.

The all-stock deal marks the final chapter for Broomfield-based McData, founded in 1982 by six former Storage Technology Corp. executives.

And it marks the loss of another Colorado-based tech company swept up in merger activity. Sun Microsystems bought homegrown StorageTek last year for $4.1 billion, and PeopleSoft Inc. - which was itself acquired by Oracle Corp. - bought Denver software maker J.D. Edwards & Co. for $1.8 billion in 2003.

Brocade's purchase of McData, which makes switches used to connect computer storage systems and computer servers, will position the merged company head-to-head against tech heavyweight Cisco Systems Inc.

But it also is likely to unleash more layoffs in Colorado's rough-and-tumble technology sector, recently bruised by more than 1,000 cuts engineered by Sun and Seagate Technology.

Brocade and McData expect the deal to produce about $100 million a year in "synergies" through job cuts and other savings. McData's work force totals about 1,460, with about 570 employees in Colorado, mainly Broomfield.

"Within the synergies, there will absolutely be layoffs. And my suspicion is there will be cuts on both sides," McData CEO John Kelley told the Rocky Mountain News.

Mike Karp, senior analyst at Enterprise Management Associates, a Boulder tech consulting firm, predicted the deal would unleash "significant" cuts, with McData employees bearing the brunt.

"Most of it is going to be on the McData side," said Karp.

Brocade, a San Jose, Calif.-based company caught up in the recent scandal over executive stock options, will pay McData investors 0.75 Brocade share for each Class A and Class B of McData's stock.

The deal values McData's stock at $4.61 a share, a 48 percent premium above the closing price of McData's Class A shares before the takeover was announced.

McData's shares jumped 14 percent Tuesday.

But Brocade's shares slumped 18 percent amid questions over whether it's paying too much for McData, which on Tuesday warned investors its second-quarter revenues would fall short of Wall Street forecasts.

The slide erased much of the initial takeover premium, leaving the offer only about 15 percent more than Monday's closing price for McData's Class A stock.

Goldman Sachs analyst Laura Conigliaro said in a research report the deal "is bound to raise questions." She added that a key question "is why Brocade felt it needed to pay . . . a 48 percent premium."

Whatever the case, the acquisition whittles to two the number of big players in the market for data-storage switches: Brocade and Cisco.

According to Wall Street firm Credit Suisse, Brocade holds about 40 percent to 45 percent of the market for fiber-channel switches while McData has about a 25 percent share.

Cisco is a recent player. Its 2002 entry heated up competition and put pressure on switch prices. The move also fanned speculation that Brocade and McData would tie the knot.

But even Tuesday's marriage announcement isn't expected to produce easy sledding for the merged company.

"Cisco has infinitely deep pockets and neither Brocade or McData can match that," said Karp of Enterprise Management Associates.

Tuesday's announcement didn't mark the first time McData has been acquired.

In 1995, disk-storage giant EMC Corp. acquired McData for $234 million. The Massachusetts company became McData's No. 1 customer.

But in 2000 McData sealed a deal to finally sell its stock on the public markets.

In return, EMC shareholders agreed to accept one share of McData stock for every share of EMC.

When it went public, McData's stock surged 205 percent on the first day of trading.

The shares hit their 52-week high of almost $142 in September 2000.

Tuesday's deal is expected to close by January.

Kelley, the McData CEO, said it was Brocade's CEO, Michael Klayko, who approached him about a merger.

It wasn't the first time the two companies had talked about a deal.

"We got a call a few weeks ago," Kelley said of the acquisition.

And what was Brocade's pitch?

"We think we have a strong story here. We'd like to talk to you," according to Kelley.

fillionr@RockyMountainNews.com or 303-954-2467

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