In an announcement on November 5, 2002, Brocade Communications Systems said that it will buy Rhapsody Networks for about $175 million in stock. Brocade will acquire all outstanding shares of privately held Rhapsody in exchange for 23.4 million shares of Brocade common stock, equivalent to roughly 10% of outstanding common stock as of the announcement date. The final price will be determined as of the deal's closing expected for January 2003.
Rhapsody, founded in June, 2000 and based in Fremont, Calif., has received $62 million in funding from Morgan Stanley, Accel Partners, Sequoia Capital, Amerindo Investment Advisors, Inc., Oracle Corporation and QTV Capital. Rhapsody's 110 employees will join Brocade and will function as an operating division of Brocade. Rhapsody's chief executive officer Michael Klayko will serve as a vice president in charge of the division and will report to Brocade's CEO Greg Reyes.
Brocade expressed that the complimentary company cultures and established sales strategy will allow for a smooth integration of the two companies. Brocade is a market leader of Fibre Channel storage products, accounting for approximately 34% of total sales. Cisco Systems entered the market in August 2002, when it bought privately held switch maker Andiamo Systems. Rhapsody is a manufacturer of a multi-protocol switching platform similar to the switch development efforts by Cisco/Andiamo, supporting Fiber Channel and Ethernet interfaces and has intelligence in the computing blade which can host software from other vendors such as VERITAS, FalconStor, StoreAge, Topio and others.
Brocade's plans were laid out in March 2002, to offer a virtualization switch, the V-switch, which runs software from multiple vendors. In the make vs. buy decision, the purchase of Rhapsody helps Brocade keep up with its competition in the offering of an intelligent virtualization switch and accelerates its time to market strategy. Research and development of the V-switch will merge into Rhapsody's products, which support multiple protocols and include in-band virtualization capabilities imbedded within a storage controller. These products correspond to Brocade's plans to provide a platform for enabling storage services, such as virtualization and replication, while supporting multiple protocols.
Rhapsody's products complement Brocade's fabric switch products by offering an open development approach for storage and data management application development, such as disaster recovery, remote copy and volume management. Rhapsody's products are accessed through an open application program interface (API), which will be integrated with the Brocade Fabric Access API for the development of these applications. Brocade stated they will work with its OEMs and software applications partners, which include EMC Corporation, Hitachi Data Systems and IBM Corporation, to develop fabric-based volume management, fabric-based data replication and fabric-based data management.
Anticipating a six to nine month development cycle by the OEMs, the first Brocade switches to incorporate Rhapsody's technologies are expected to be available by the second half of 2003 and will be branded under Brocade. The Rhapsody intelligent fabric application development platform is available now to OEM partners.
Evaluator Group comments:
The consolidation of SANs has created a management problems for end-users and storage vendors are now working to simplify the management of heterogeneous storage environments. Intelligent virtualization switches for SANs is a solution that will help centralize the management of these environments. Major market players acquiring startups to enhance its product offerings, especially in the software arena, is a trend that is becoming widespread in the storage sector.
Brocade will have to be aware of situations created in which they will compete with its storage subsystem OEM companies that have been its traditional partners, like EMC and IBM, who may have its own product offerings in these areas.
The acquisition may be an accelerator to market of Brocade's plans for a differentiated switching product. The key for success will be in signing OEMs and other distribution channels to bring the advanced functions to customers.
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