Broadcom, Brocade deal slices Fibre Channel from Ethernet
His plan to acquire Brocade for $5.9 billion could stimulate a trend to more deals that cross boundaries between semiconductor and systems companies. It also is expected to bolster prices and thus longevity in the maturing Fiber Channel market and shake up players in Ethernet networking.
Under the deal, Broadcom will round out its storage networking business with Brocade’s Fiber Channel switches and sell its Ethernet networking business for an expected $1-2 billion. The system-level switches are expected to add nearly $1 billion to Broadcom’s annual revenues and bolster its overall profit margins by as much as 5%.
Broadcom has sold Ethernet and Fiber Channel server cards for some time. The Brocade deal puts Broadcom in the systems business for the first time and comes with a service and support group. The board, systems and services business are attractive because they sport more attractive profit margins than chips.
Tan was quick to point out he sees little competition with OEM customers such as Cisco, the only other large Fiber Channel switch maker. Cisco sells mainly direct to end users while Brocade’s customers are typically OEMs such as Dell and Hewlett-Packard Enterprise. Cisco uses its own Fibre Channel silicon but does have some sales to OEMs, a Cisco engineer said.
“We consider our OEM customers to be strategic partners and we have no desire to compete with them,” said Tan in a conference call with financial analysts, noting he will “work with Brocade to initiate the sales process immediately” for Brocade’s Ethernet division.
Although both Brocade and Cisco sell the Fiber Channel switches to value-added resellers, overlap is minimal, said Alan Weckel a vice president at market researcher Dell’Oro Group. The market has few new users and existing ones tend to stay with either Cisco or Brocade who split the vast majority of the market he said.
“It’s not like Broadcom is going to attack Cisco’s base – that’s not how the Fibre Channel market has behaved since 2008,” said Weckel.
The bad news for Fibre Channel users is Broadcom may find creative ways to package existing optical modules, server boards and the new switches to increase prices. “Avago has done this with Emulex,” a network board maker it bought for $606 million last year, said Weckel.
Other vendors likely will come under pressure including Cavium which acquired QLogic’s storage networking business but lacks a Fibre Channel switch product and Atto Technologies that lacks scale.
Dell’Oro said Fiber Channel unit sales are peaking at about 12 million ports this year. Unit sales are expected to decline 5-10% a year, but prices may rise by a similar amount, creating a fairly flat market with higher margins than typical of Broadcom’s chip business, Weckel said.
Tan noted prices also may rise as user migrate over the next five years from today’s 16 Gbit/second Fibre Channel networks to 32G versions. The T11 standards group is working on defining the 64G speed for a single lane and the 256G speed over four lanes with placeholders for single-lane 128G and 256G on the road map.
Several OEMs will be interested in buying Brocade’s Ethernet business, largely for its U.S. government business and the campus Wi-Fi gear Brocade acquired with Ruckus, said Weckel. Potential suitors include Dell, Juniper, Extreme Networks or a private equity firm interested in further carving it up, he said.
The buyer could become buy “a clear #3 behind Cisco and HP” in wired and wireless Ethernet systems, changing the market balance and likely triggering other moves, Weckel said.
The deal is the latest in a string of bold moves Tan has architected recently. He closed in March the $37 billion merger of Avago and Broadcom, announcing $300 million in cuts.
The Brocade deal fills a missing piece in a string of recent acquisitions of storage products, starting in December 2013 with the $6.6 billion deal to buy LSI. Then Avago kept most of LSI’s storage business but sold off in June 2014 flash divisions to Seagate and two months later a communications SoC group to Intel in deals that raised a total $1.1 billion.
In the midst of those deals Avago bought the PCI Express switch and bridge business of PLX for $309 million. About six months later, still as a separate Avago in acquired Emulex, ironically paying significantly less than the former Broadcom had offered in a bidding war in 2009.
Tan said integration of Avago and Broadcom, his boldest move to date, is going “better than planned” making the management team “very comfortable” in making the Brocade offer.
Expect more deals. “We have not reached a point where we say that we are done. There are a lot of opportunities in this marketplace,” said Tan, suggesting deals are coming to him because “it’s not us on the prowl.”
“He’s very, very good at this and has an almost a perfect track record,” doing essentially what private equity forms do, said Weckel.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times