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IBM eats Blade Network for switches

Another $400m in 'research and development'

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Sam Palmisano got out the Big Blue check book once again this morning and wrote out what was reportedly a $400m check to the owners of privately held Blade Network Technologies.

For a company whose chief executive officer and chairman has slammed rival Hewlett-Packard over its inability to invest in its own innovation, IBM is sure on a spending spree to fill in some pretty big product gaps of its own.

Blade Network is the networking spinout of the defunct Canadian telecom giant Nortel Networks that was sold to private equity firm Garnett & Helfrich Capital in 2006. IBM and Blade Network did not disclose the terms of the acquisition deal.

Blade Network makes the Ethernet and 10 Gigabit Ethernet switches commonly used in blade servers manufactured by IBM and HP, but its products do not carry its own brand when used inside of the blade chassis. The company's RackSwitch top-of-rack products do, however, carry the BladeNetwork brand.

Back in September 2009, Japanese server maker NEC, which also resells Blade Network's blade switches, and Juniper Networks, which rebadges the RackSwitch products, were among the four vendors who kicked in $10m in Series B funding to the switch maker. At the time, Garnett & Helfrich were also putting in some of that $10m kitty, as was an unnamed IT player who we all guessed was none other than IBM. Blade Network has tight ties to IBM because of the embedded switches it makes for the BladeCenter blade server chassis as well as the reseller agreement in place to peddle RackSwitch products. Moreover, to help bolster its IP portfolio (and thereby shield it somewhat from lawsuits from bigger switching players), Blade Network inked a cross-patent licensing deal with Big Blue in April 2009. With IBM probably accounting for around half of its revenues, which are not disclosed, Blade Network was a natural target for acquisition by IBM. And for HP, for that matter.

As part of its investment in Blade Network a year ago, NEC's pencil pushers reckoned that Blade Network had a market value of around $230m, which Vikram Mehta, Blade Network's president and chief executive officer, bragged to El Reg a year ago. If that make value has not changed, then the price premium that IBM is paying for the company is around 74 per cent. As of the Series B funding last year, Nortel still had a stake in Blade Network, which was under 20 per cent.

The blade and rack switch maker had an annual revenue run rate of around $100m in 2009, and was growing at above 30 per cent. Provided revenues are growing at about the same rate and Blade Network is on track to do around $130m in 2010, then IBM is paying a 3X multiple against revenues to get the switch maker. And probably to keep Blade Network out of the grips of HP.

That revenue multiple for Blade Network is a lot lower than the 7X that Big Blue shelled out last week for data warehousing appliance maker Netezza, which is on track for about $250m in revenues and some modest profits this year.

IBM says that about half of its BladeCenter customers use Blade Network switches, so you can see why Big Blue cannot afford to let this company slip into HP's hands. HP, by contrast, makes its own blade switches as well as a slew of switches and routers that come from its former 3Com and ProCurve product lines. HP bought 3Com last November for $2.7bn, and has been purging its data center of Cisco gear.

IBM had plenty of smarts in the networking arena and the Internet might be a better place had Big Blue open sourced its Systems Network Architecture protocols decades ago so they could have been the backbone of the Internet. IBM might have been Cisco then, instead of selling off its networking business to Cisco in 1999. For many years, SNA was arguably better than TCP/IP, but IBM kept such a tight grasp on it that it killed it, leaving the market open for companies like Cisco to swoop in and dominate.

This acquisition of Blade Network does not represent any major reversal, but if IBM buys QLogic, Voltaire, or Mellanox, we could see the IBM-Cisco partnership, which has been strained by Cisco's entry into the server racked in March 2009, strained. HP and Cisco have hit the breaking point already this past February, when Cisco cut HP from its certified partner program, leaving it without all those juicy switch and router product roadmaps.

IBM expects the Blade Network Technologies deal to close in the fourth quarter. That is provided regulators approve the deal - which they will - and someone doesn't make a better offer - which someone just might. ®

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