Brocade Partners Hold Off Investments As Lack Of Clarity Looms Over Broadcom Acquisition

Channel partners were eager to cash in on Brocade Communications' $1.2 billion acquisition of Ruckus Wireless, but Broadcom dampened their enthusiasm when it swooped in to buy Brocade. The chip maker revealed as the acquisition was announced that it would sell off Brocade's IP networking business, including Ruckus Wireless.

Partners initially said they were bewildered and confused by Brocade's discussion to be acquired for $5.9 billion. Some solution providers now say they are holding off their investment in the San Jose, Calif.-based vendor.

"We'd be hard-pressured to say, 'We're going to make a significant investment in a vendor when we don’t know who's going to own it in three months from now," said Barry Shevlin, CEO of Vology, a Tampa, Fla.-based solution provider, ranked No. 132 on CRN's 2016 Solution Provider 500 list. Vology partners with both Brocade and Ruckus. "It has the potential to slow things down for us. Some of our competitors are using it as a way to have a different type of conversation with customers."

[Related: Partners 'Bewildered and Confused' By Broadcom's $5.9B Acquisition Of Brocade-Ruckus]

Sponsored post

Shevlin, who says Vology's Brocade-Ruckus business is up 10 percent in 2016, said the ownership and stability of Brocade's networking business is critical to his company.

"If they end up in the right place, our business will grow or potentially double, if it's with the right partner. But if they end up being bought by someone we don't to a lot of business with, or don't have a lot of traction with, then that could potentially go to zero," said Shevlin. "If we could ask for one thing, it would be clarity sooner rather than later."

In a statement to CRN, Brocade said it had had "significant interest from several buyers over the last few weeks," and discussions are "progressing well."

"In the meantime, Brocade will continue to honor all our commitments to partners and customers," said Brocade added. "We are fully committed to ensuring the smoothest possible transition for all of our partners and customers and hope we can count on their continued support."

One executive from a solution provider – a longtime Ruckus partner – said Brocade has been asking its channel community to be patient, but that can only work for so long.

Broadcom is expecting to complete its acquisition of Brocade in the second half of its fiscal year 2017, which runs from May 1 to Oct. 31. Partners worry that the timeframe means a parent company for Brocade's networking business might not be official for at least another six months.

"It's making us hold off, for now, on how we want to continue investing with Ruckus, now Brocade," said the executive, who asked not to be identified. "Being told to be patient is okay if it's measured in weeks or a month or two, but if that really starts to stretch out, I can see it becoming problematic … We would certainly like some clarity to know where they are going."

Networking Analyst Matthias Machowinski of research firm IHS, said it is common for organizations to delay spending if the future of a vendor is unknown. "The faster they make a decision, the better to get beyond these delays – it's just natural for buyers to say, 'I want to know what the future of this company is before I make a significant investment here,'" said Machowinski. "They're looking at a mid-2017 decision and while that's still officially the case – that's six months out, and that could create some serious purchasing delays."

Broadcom declined to comment.

Brocade was in acquisition talks with Broadcom even before closing its Ruckus deal in May, according to a proxy statement Brocade filed with the U.S. Securities and Exchange Commission.

Channel partners were thrilled when Brocade revealed that it would be acquiring Ruckus; the move create a more formidable foe against larger networking equipment competitors. In April, Brocade CEO Lloyd Carney said that the combined companies would create the No. 1 vendor in storage-area networking and service provider Wi-Fi; as well as the No. 2 player in data center networking.

On May 19, 2016, Brocade and Broadcom executives held a meeting in which Broadcom expressed interest in exploring an acquisition of the company's Fibre Channel business, according to an SEC filings by Brocade. The filings said the executives did not discuss price or any other potential terms.

Brocade completed its acquisition of Ruckus on May 27. Throughout June and July, Brocade executives – including CEO Carney – met with Broadcom officials and advisors to discuss the potential acquisition, eventually taking the matter to the company's board, according to the SEC filings.

Discussions and negations continued for several months, then on Nov. 1, the companies finalized the negotiations of the draft merger agreement, according to the filing. Broadcom expects to finalize the deal next year, between May and October.

One source familiar with the situation said there's "an enormous amount of interest" from potential buyers.

"Frankly, I think people would be surprised at how many interested buyers there are," the source told CRN, who declined to be identified. "Those buyers are a mix of financial sponsors, so private equity companies and also strategic buyers …. There is a very strong desire from all the parties – Brocade, Broadcom and any potential buyer – a strong desire to move as quickly as possible."

Andrew Fisher, CEO of Myriad Supply, a New York-based solution provider and Brocade partner – ranked No. 228 on CRN's 2016 SP500 list – said he's optimistic that Brocade's buyer will help fuel sales growth.

"If they remain a standalone company, that's great because we'll continue to work with many of the same people and processes and go-to-market strategy," said Fisher. "If they get acquired by a larger player in the marketplace, chances are we're already doing business with them and will roll up nicely into their portfolio." Myriad said its Brocade-Ruckus revenues increased 20 percent in 2016 compared to 2015.

Last month, Brocade reported record revenues for its fourth fiscal quarter – capturing $657 million in sales, up 12 percent year over year. The company's networking product revenue was up 51 percent to $256 million compared to a year ago, primarily driven by the inclusion of $96 million of Ruckus's product revenue.

Partners said concerns about Brocade's future have yet to trickle down to customers, but they want answers soon.

"We certainly would like some clarity to know where they are going, where it's going to end up – it's a little frustrating," said Vology's Shevlin.