Reviewing Dell’s Acquisition of Force10

Now seems a good time to review Dell’s announcement last week regarding its acquisition of Force10 Networks. We knew a deal was coming, and now that the move finally has been made, we can can consider the implications.

It was big news on a couple fronts. First, it showcased Dell’s continued metamorphosis from being a PC vendor and box pusher into becoming a comprehensive provider of enterprise and cloud solutions. At the same time, and in a related vein, it gave Dell the sort of converged infrastructure that allows it to compete more effectively against Cisco, HP, and IBM.

The transaction price of Dell’s Force10 acquisition was not disclosed, but “people familiar with the matter” allege that Dell paid about $700 million to seal the deal. Another person apparently privy to what happened behind the scenes says that Dell considered buying Brocade before opting for Force10. That seems about right.

Rationale for Acquisition

As you’ll recall (or perhaps not), I listed Force10 as the second favorite, at 7-2, in my Dell Networking Derby, my attempt to forecast which networking company Dell would buy. Here’s what I said about the rationale for a Dell acquisition of Force10:

 “Dell partners with Force10 for Layer 3 backbone switches and for Layer 2 aggregation switches. Customers that have deployed Dell/Force10 networks include eHarmony, Salesforce.com, Yahoo, and F5 Networks.

Again, Michael Dell has expressed an interest in 10GbE and Force10 fits the bill. The company has struggled to break out of its relatively narrow HPC niche, placing increasing emphasis on its horizontal enterprise and data-center capabilities. Dell and Force10 have a history together and have deployed networks in real-word accounts. That could set the stage for a deepening of the relationship, presuming Force10 is realistic about its market valuation.”

While not a cheap buy, Force10 went for a lot less than an acquisition of Brocade, at a market capitalization of $2.83 billion, would have entailed. Of course, bigger acquisitions always are harder to integrate and assimilate than smaller ones. Dell has found a targeted acquisition model that seems to work, and a buy the size of Brocade would have been difficult for the company to digest culturally and operationally. In hindsight, which usually gives one a chance to be 100% correct, Dell made a safer play in opting for Force10.

IPO Plans Shelved

Although Force10 operates nominally in 60 countries worldwide, it derived 80 percent of its $200 million in revenue last year from US customers, primarily data-center implementations. Initially, at least, Dell will focus its sales efforts on cross-pollination between its and Force10’s customers in North America. It will expand from there.

Force10 has about 750 employees, most of whom work at its company headquarters in San Jose, California, and at a research facility in Chennai, India. Force10 doesn’t turn Dell into an overnight networking giant; the acquired vendor had just two percent market share in data-center networking during the first half of 2011, according to IDC. Numbers from Dell’Oro suggest that Force10 owned less than one percent of the overall Ethernet switch market.

Once upon a time, Force10 had wanted to fulfill its exit strategy via an IPO. Those plans obviously were not realized. The scuttlebutt on the street is that, prior to being acquired by Dell, Force10 had been slashing prices aggressively to maintain market share against bigger players.

Channel Considerations

Force10 has about 1,400 customers, getting half its revenue and the other half from channel sales. Dell doesn’t see an immediate change in the sales mix.

Dell will work to avoid channel conflict, but I foresee an increasing shift toward direct sales, not only with the Force10’s data-center networking gear, but also with any converged data-center-in-a-box offerings Dell might assemble.

Converged Infrastructure (AKA Integrated Solution Stack) 

Strategically, Dell and its major rivals are increasingly concerned with provision of converged infrastructure, otherwise known as as an integrated technology stack (servers, storage, networking, associated management and services) for data centers. The ultimate goal is to offer comprehensive automation of tightly integrated data-center infrastructure. These things probably will never run themselves — though one never knows — but there’s customer value (and vendor revenue) in pushing them as far along that continuum as possible.

For some time,  Dell has been on a targeted acquisition trail, assembling all the requisite pieces of the converged-infrastructure puzzle. Key acquisitions included Perot Systems for services, EqualLogic and Compellent for storage, Kace for systems management, and SecureWorks for security capabilities. At the same time, Dell has been constructing data centers worldwide to host cloud applications.

Dell’s converged-infrastructure strategy is called Virtual Network Services Architecture (VNSI), and the company claims Force10’s Open Cloud Networking (OCN) strategy, which stresses automation and virtualization based on open standards, is perfectly aligned with its plans. Dario Zamarian, VP and GM of Dell Networking, said last week that VNSI is predicated on three pillars: “managing from the edge,” where servers and storage are attached to the network; “flattening the network,” which is all the rage these days; and “scaling virtualization.”

For its part, Force10 has been promoting the concept of flatter and more scalable networks comprising its interconnected Z9000 switches in distributed data-center cores.

 The Network OS Question

I don’t really see Dell worrying unduly about gaining greater direct involvement in wiring-closet switches. It has its own PowerConnect switches already, and it could probably equip those to run Force10’s FTOS on those boxes. It seems FTOS, which Dell is positioning as an open networking OS, could play a prominent role in Dell’s competitive positioning against Cisco, HP, Juniper, IBM, and perhaps even Huawei Symantec.

Then again, Dell’s customers might have a say in the matter. At least two big Dell customers, Facebook and Yahoo, are on the board of directors of the Open Networking Foundation (ONF), a nonprofit organization dedicated to promoting software-defined networking (SDN) using the OpenFlow protocol. Dell and Force10 are members of ONF.

It’s possible that Dell and Force10 might look to keep those big customers, and pursue others within the ONF’s orbit, by fully embracing OpenFlow. The ONF’s current customer membership is skewed toward high-performance computing and massive cloud environments, both of which seem destined to be aggressive early adopters of SDN and, by extension, the OpenFlow protocol.  (I won’t go into my thoughts on OpenFlow here — I’ve already written a veritable tome in this missive — but I will cover it in a forthcoming post.)

Notwithstanding its membership in the Open Networking Foundation, Force10 is perceived as relatively bearish on OpenFlow. Earlier this year, Arpit Joshipura, Force10’s chief marketing officer, indicated his company would wait for OpenFlow to mature and become more scalable before offering it on its switches. He said “big network users” — presumably including major cloud providers — are more interested in OpenFlow today than are enterprise customers. Then again, the cloud ultimately is one of the destinations where Dell wants to go.

Still, Dell and Force10 might see whether FTOS can fit the bill, at least for now. As Cindy Borovick, research vice president for IDC’s enterprise communications and data center networks, has suggested, Dell could see Force10‘s FTOS as something that can be easily customized for a wide range of deployment environments. Dell could adapt FTOS to deliver prepackaged products to customers, which then could further customize the network OS depending on their particular requirements.

It’ll be interesting to see how Dell proceeds with FTOS and with OpenFlow.

 Implications for Others

You can be sure that Dell’s acquisition of Force10 will have significant implications for its OEM partners, namely Juniper Networks and Brocade Communications. From what I have heard, not much has developed commercially from Dell’s rebranding of Juniper switches, so any damage to Juniper figures to be relatively modest.

It’s Brocade that appears destined to suffer a more meaningful hit. Sure, Dell will continue to carry and sell its Fiber Channel SAN switches, but it won’t be offering Brocade’s Foundry-derived Ethernet switches, and one would have to think that the relationship, even on the Fiber Channel front, has seen its best days.

As for whether Dell will pursue other networking acquisitions in the near team, I seriously doubt it. Zeus Kerravala advises Dell to buy Extreme Networks, but I don’t see the point. As mentioned earlier, Dell already has its PowerConnect line, and the margins are in the data-center, not out in the wiring closets. Besides, as Dario Zamarian has noted, data-center networking is expected to grow at a compound annual growth rate of 21 percent through 2015, much faster than the three-percent growth forecast for the rest of the industry.

The old Dell would have single-mindedly chased the network box volumes, but the new Dell aspires to something grander.