McData Workers Brace For Worst After Brocade Deal

BROOMFIELD, Colo. — The Flatirons-Interlochen industrial park near here could face a double whammy following Brocade Communications Systems Inc.'s all-stock offer of $713 million to acquire McData Corp.

Brocade CEO Michael Klayko insisted McData's Fibre Channel Director and SAN products complemented its switches, but financial analysts participating in a conference call on Tuesday (Aug. 8) all but concluded McData was acquired for its customer base alone.

As analysts pressed Klayko on when McData products might be discontinued—and why Brocade did not simply wait for McData to go out of business—Klayko insisted the data center products manufactured by 24-year-old McData were well worth the premium paid for the company.

Employees at McData headquarters here, however, need only look up the hill to realize how quickly such promises fade. Sun Microsystems Inc. has realized product value from its acquisition of Storage Technology Corp., based in nearby Louisville. However, Sun announced in late July that the StorageTek headquarters would be closed, with employees transferring to nearby Sun facilities.

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Two weeks later, Sun announced that more than 300 workers would be laid off from the Broomfield-Interlochen facility.

"In 2001, the U.S. [Highway] 36 corridor south of Boulder went from being a boom town to a ghost town overnight," said one design engineer in an LSI Logic storage group working near here, who asked not to be named. "It never really recovered to its [year] 2000 levels, and now things are looking downright scary with StorageTek and McData going right in a row. This has direct implications for people in this area working on storage subsystems and chips, and everyone knows it."

McData has more than 1,400 employees, and executives from both companies said redundancies could be as high as half of all workers. An even greater concern for McData employees is that Brocade may centralize all employees in the San Jose area, and try to realize cost advantages by eliminating the Colorado facilities.

Brocade insisted the acquisition would be accretive on a non-GAAP earnings-per-share basis by the fourth quarter of combined Brocade-McData operations. However, the company provided no estimates on how deep the cuts in personnel might have to be in Colorado to sustain the combined business.

With roots in storage control for mainframes, McData expanded into high-speed network protocols with its acquisition of Computer Network Technology Corp. last year. In late 2003, McData expanded into lower-end enterprise systems with the acquisition of Sanera Systems Inc.

The company has strong ties to EMC and Fujitsu Ltd., one area of interest to Brocade. But McData's revenues didn't meet expectations (about $152 million range) in its most recent quarterly report.

Brocade faced a spate of bad publicity last month when former CEO Gregory Reyes was indicted by federal regulators on criminal charges related to backdating of stock options. Reyes was arraigned in San Francisco on Aug. 2 and freed on $2 million in bail.