Brocade deals for Foundry Networks in Cisco salvo

San Jose-based Brocade said Monday it has agreed to pay $3 billion to acquire one of Cisco's much-smaller competitors, Foundry Networks Inc., to try and make that happen.

The proposed acquisition would meld two companies with presence deep in the data center and pose a direct challenge to Cisco, which at $29 billion in annual sales is the world's leader in Internet networking equipment.

Surging Internet traffic, especially in bandwidth-hogging video, has driven intense demand for the routers and switches that direct Internet traffic, Cisco's home turf. That's also lifted the fortunes of Cisco's smaller rivals, including Santa Clara-based Foundry Networks, which specializes in high-end networking gear, making them attractive takeover targets.

Brocade wants Foundry Networks because Brocade's primary business--it's dominant in a type of switch that connects servers to data storage machines--is under pressure. Data centers are changing, and networking companies are eyeing acquisitions or expensive R&D efforts to come up with technologies that make the servers, storage and related equipment more robust and easier to manage.

The acquisition promises to make Brocade a more well-rounded competitor to Cisco, but isn't likely to substantially dent Cisco's dominance because Foundry Networks, with $607 million in sales last year, is considered a niche player.

Foundry owned just 2 percent of the market for Ethernet switches in 2007, while Cisco had 71 percent, a huge lead in supplying essential networking gear, according to data from the Dell'Oro Group research firm.

Alan Weckel, a senior analyst with Dell'Oro, said competitive pressures probably drove Brocade into pursuing Foundry Networks, since Cisco is pushing a convergence of technologies that threatened Brocade's business.

Brocade specializes in switches that use so-called Fibre Channel technology.

As servers become more powerful, and information technology managers demand more control over increasingly complicated machinery, Cisco has been advocating that the Fibre Channel and Ethernet technologies themselves should be merged somewhat--a direct assault on the core business of Brocade and Foundry Networks, Weckel said.