McData Bets $200M On Storage Connectivity, Intelligence With Acquisitions

McData, which provides Fibre Channel switches and other hardware, software and services for enterprise-class SANs, is acquiring San Jose, Calif.-based Nishan Systems for $83 million in cash $2 million in assumed debt. Nishan was one of the first to bring to market IP-based SAN equipment, and has products working with the iSCSI, Internet Fibre Channel Protocol (iFCP) and Fibre Channel over IP (FCIP) protocols.

Nishan brings McData multi-protocol networking capabilities, including routing to connect heterogeneous SANs together, long-distance heterogeneous SAN connectivity regardless of customer size, and iSCSI to drive low-cost storage networking to the small and midsize business space, said Mike Gustafson, vice president of worldwide marketing at McData.

Nishan, founded in 1999, had received $90 million in venture funding and a $10 million line of credit from strategic investors such as Sun Microsystems, Dell and Quantum, as well as from a number of venture capitalists.

Also on the acquisition roster for McData is Sanera Systems, a Sunnyvale, Calif.-based developer of Fibre Channel SAN storage director-class switches with up to 256 2Gbps ports or 64 10Gbps ports, for about $102 million in cash.

While McData had earlier said it would introduce a 10Gbps director-class switch capable of hosting tiered data center connectivity from enterprise mission-critical applications to department-level to low-end backup applications late next year, the acquisition of Sanera and its director-class switch technology will accelerate the introduction to the second quarter of 2004, said Gustafson.

Sanera, founded in late 2002, has to date received $101 million in funding from several venture capitalists including ArrowPath, CMEA Ventures, Enterprise Partners Venture Capital, Goldman Sachs, Greylock, and Storm Ventures.

McData spent an additional $6 million to purchase 15 percent of Aarohi Communications, a privately-held developer of system-on-a-chip solutions for adding intelligence to storage networks.

Mike Gustafson, vice president of worldwide marketing at McData, said the investments will help enhance the scalability, multi-protocol and intelligence capabilities of the company's products.

With Aarohi, McData will get the technology to allow intelligence to be place anywhere in the SAN from the host to the network to the storage device, said Gustafson.

When the technologies are integrated together, it will give McData access to an expanded market, Gustafson said. "Regardless of protocol, we will have broadened technologies from which to pull to develop products," he said.

About 50 percent of McData's products go either directly to solution providers or via OEMs to solution providers, and just under 50 percent go via OEMs direct to their customers, said Gustafson.

Also on Monday, McData reported revenue of $107.0 million for the quarter ended July 31, compared to revenue for the same quarter last year of $77.3 million. Income for the second quarter of 2003 was $9.1 million, or 8 cents per share, compared to a loss of $3.9 million, or 3 cents a share, a year ago.

Despite the strong second quarter, analyst firm RBC Capital Markets lowered its outlook on McData. The research firm downgraded McData based on the acquisitions and on increasing competitive pressures from Brocade Communications, which has been dropping prices, and Cisco, which is expected to unveil mid-range storage switches soon.

Carl Wolfston, director of Headlands Associates, a Pleasanton, Calif.-based solution provider and partner of Brocade, said the acquisitions could have a strong impact on the market, especially where Brocade and Cisco are concerned. "It's a three-horse race, and McData will make sure it stays a three-horse race," he said.

The Nishan acquisition will put McData squarely in Cisco's storage space at the expense of Brocade, said Wolfston.

For instance, to do FCIP today, it could cost $40,000 to $80,000 to use solutions from vendors such as Minneapolis-based CNT, Wolfston said. However, Cisco is planning to unveil a $10,000 to $15,000 blade for its switch to do FCIP, while Nishan gives McData the same capability at a similar price point.

Brocade, like McData, had certified Nishan for use with its switches for FCIP, said Wolfston. "Cisco will have FCIP, now McData will have it, too," he said. "Where does that leave Brocade?"

The situation with iSCSI is similar, where Cisco has an iSCSI blade and McData will have Nishan, Wolfston said. "If a Brocade customer asks for iSCSI, Brocade will probably tap dance around the customer to say he doesn't need iSCSI," he said. "Or Brocade will have to buy iSCSI from someone else."

Shares of McData, which unveiled the acquisitions before the market opened, fell nearly 18 percent, or $2.26 to $10.40 by the close of the market on the news.