Dell Inc's deal on Wednesday to buy Force10 Networks will give the world's second-largest computer maker inroads into Cisco Systems Inc's turf -- networking.
Force10 is a data center networking company that makes ethernet switchers and routers, and focuses on serving booming social media companies like Facebook and Zynga as well as giants like Google Inc.
With the acquisition of Force10 at an undisclosed price, Dell is creating a more serious competitor to Cisco, adding to the networking giant's troubles.
Cisco is already facing intense competition from smaller networking companies like Juniper Networks Inc, Check Point Software Technologies, F5 Networks Inc and Riverbed Technology Inc.
Cisco's switching business has seen sales fall in recent quarters, and analysts have argued the company has stretched itself too thin by making several large acquisitions in the consumer market, causing it to lose focus of its core switching and routing businesses.
Force10, which generated about $50 million in revenue in the first quarter of 2011, has an edge over competitors.
Cisco, Juniper and Brocade Communications Systems Inc all provide switching and routing technology, although very few like Force10 have the technological capability that creates the backbone of the major data centers, sources said.
Cisco declined to comment.
The deal also means that Dell is no longer interested in buying networking equipment supplier Brocade, whose market capitalization is $2.8 billion, sources said. Dell was reported to be eyeing Brocade as well.
Over the past three years Dell has expanded its enterprise portfolio through acquisitions to include server and storage services.
In May, Dave Johnson, Dell's senior vice president of corporate strategy, told Reuters that it will continue to seek companies with valuations in the $1 billion to $5 billion range.
Dell was advised by Evercore Partners on the Force10 deal. The transaction was the first for technology investment banker Eric Mandl at his new firm. Tor Braham, head of technology M&A at Deutsche Bank, led the deal for Force10.
SALE VERSUS IPO
Force10's decision to sell to Dell is the latest in a string of private technology companies in the sector that are opting to sell rather than go public, as tech giants looking to build a broader suite of services swoop in with rich offers.
Force10 had filed its initial public offering with the Securities and Exchange Commission last year.
But in 2011, the company started discussions with a few interested parties over a sale, one source said.
Other companies that have in recent months opted to sell rather than go public include Internet video conferencing service Skype, which sold to Microsoft Corp for $8.5 billion, and Web hosting company Go Daddy which sold itself to a private equity consortium led by KKR and Silver Lake this month for $2.25 billion.
(Reporting by Nadia Damouni; Editing by Phil Berlowitz)