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7 April 2016

Ruckus – a strong buy for Brocade, Juniper isolated again

Pity poor Juniper. The networking company’s alliance with Ruckus Wireless last summer raised hopes that it would strike it third time lucky in the WiFi market, filling the gaping wireless gap in its platform. Now Brocade has snatched carrier WiFi leader Ruckus from under its rival’s nose with a $1.2bn acquisition, the latest in a series of deals which could make Brocade a more dangerous challenger to Cisco in the service provider space than Juniper itself.

The acquisition makes Brocade look far more like Cisco in the wireless operator space – in its statement, it said the key aim was to address “critical networking requirements from the data center to the wireless network edge”. As enterprise networks and data centers converge with telecoms infrastructure, there are new opportunities for the corporate switch/router vendors, and all of the majors – Cisco, Huawei, HPE and Brocade – are aggressively targeting the segment, which puts further pressure on Juniper, traditionally the most heavily focused on operators. Brocade expects that, with the acquisition of Ruckus, it will claim number one spot in service provider WiFi as well as storage area networking, while being number two in data center networking, and number three in enterprise WLAN.

By contrast, Juniper has lost several strategic partners to others’ acquisitions recently – its sales and marketing arrangement with Nokia will be squeezed out by the Alcatel-Lucent merger; reports that it might be bought by Ericsson ended when the Swedish firm got into bed with Cisco; and HPE snapped up Juniper’s previous WiFi partner Aruba. Juniper’s own WiFi acquisition, of Trapeze Networks back in 2010, failed to deliver the results the firm had hoped for and it has remained a tiny player in the WLAN market with less than 1% share, excluding its Ruckus reseller pact.

This has left it as a wallflower in the accelerating search for strategic partners to address the new-look carrier network market, one categorized by virtualization and software-defined networking (SDN), wireless-first access, cloud and video infrastructure, and increasingly commoditized switches and routers. It has not stood still – it recently laid the foundations of an optical business with the acquisition of BTI and its products for superfast interconnections between data centers, and it has been ahead of the game in some of its SDN moves. CEO Rami Rahim has intensified the focus on physical and SDN networks while relying more heavily on partners in less fundamental areas like WLAN, and he believes in blurring the lines between enterprise and service provider portfolios as these requirements increasingly converge.

However, losing Ruckus to Brocade may sound the death knell for any presence in the wireless and access market, leaving its competitor in the stronger position to challenge Cisco as an end-to-end player stretching from cloud platforms to the mobile edge. Like Cisco and Juniper, Brocade has been working hard in the NFV (Network Functions Virtualization) area, partly as a way to penetrate the carrier and access network markets by the back door as these shift away from traditional platforms. Now Ruckus will help it to extend its reach further, complementing previous purchases like Connectem and giving it many of the tools to provide the flexible, on -demand networks that operators will demand in future.

So far, that effort has centered primarily on the core network, where Brocade’s new Virtual Core for Mobile (VCM) is designed to go up against Cisco’s Virtualized Packet Core (VPC) and NFV Infrastructure Solution (NFVI).VCM, announced at Mobile World Congress in February, is based on the Connectem acquisition of last year, and its value proposition looks well beyond the early arguments for carrier virtualization, which were mainly about saving on the cost of specialized hardware by implementing network functions as virtual machines on standard boxes. Instead, Brocade is eyeing the strategies of operators like AT&T and Telefonica, which aim to use the agility and flexibility of virtualized networks and SDN controllers to support capacity on-demand services for enterprises, service providers and content partners, as well as internal applications – driving new revenue streams as well as mapping costs to capacity on a by-the-minute basis.

So Brocade’s VCM claims to be ‘5G-ready’ to support network slicing – the ability to ring-fence virtualized slices of the network and dedicate them to particular applications or customers – with independent localization and scaling of the control and user planes. This could be used to enable slicing for different IoT services, and Brocade also positions it as an enabler of ‘packet core-as-a-service’ for hosting MVNOs in a flexible, on-demand way, or for facilitating the introduction of new services by the MNO itself.

An early customer is SmartSky Networks, which provides in-flight data communications, and is using VCM and the Brocade vEPC to connect its 4G air-to-ground broadband network to more than 250 cell sites across the US.

Also important in these flexible on-demand strategies is Mobile Edge Computing, and Brocade recently launched MEC capabilities based on its vRouter, IPsec termination and firewall functions. These were also the result of an acquisition – 2012’s purchase of Vyatta. It says it now allows MNOs to extend the cloud to the network edge in order to support new services and revenues, and improve user experience. Another mobile-focused takeover was of Vistapointe, whose dowry was a virtual network analytics product for wireless systems.

Brocade has always been clear that it would concentrate its expansion into the operator market on new opportunities like the Internet of Things and enterprise small cells, rather than going head-to-head with the macrocell giants. This was an approach which has mirrored that of Cisco, which has also set up a pincer movement based on small cells, carrier WiFi and transport networks.

For both suppliers though, the line between their routers and cloud platforms, and the RAN, has blurred with the prospect of virtualization extending into the wireless access market. Full-scale Cloud-RAN is years away for all but a handful of operators, but some are already experimenting with virtualized gateways to run clusters of small cells or WiFi access points in urban and enterprise environments, and as these trials start to reach the macrocells, the enterprise networking giants can move with them.

Ruckus will be a strong asset in this gradual transition since it has already been active in developing NFV-enabled WiFi platforms, including being a partner for Google’s scheme to roll out ‘business homespots’ in the US – hotspots managed from the cloud, which are offered to small and medium enterprises if they keep a second SSID open for public access. This aspect of its portfolio is likely to be developed rapidly by Brocade, responding to Cisco’s similar activities since it acquired cloud-based WiFi company Meraki.

Indeed, the acquisition is indicative of some of the key technologies which will be driving M&A as enterprise and carrier solutions converge. These include solutions for in-building coverage, which are increasingly essential as firms go mobile-first (a recent survey commissioned by the Small Cell Forum found that two-thirds of companies feel poor cellular coverage indoors affects their business). For optimal economics, coverage and density, these solutions will need to combine different elements, including licensed and unlicensed spectrum small cells, support for multi-operator and neutral host approaches, and virtualized gateways which can make densification more affordable and manageable, and can enable managed services for corporate WiFi and small cells.

Ruckus is active in all these strategic areas and so will add a broad wireless platform to Brocade’s offerings for enterprise IT departments, systems integrators and business-focused operators. Although its roots are firmly in public and home WiFi, it has been expanding into heterogeneous solutions which can also incorporate licensed spectrum. At Mobile World Congress, it showed off OpenG, which combines coordinated shared spectrum, such as the 3.5 GHz airwaves in the US, with neutral host-capable small cells for in-building systems. Ruckus also joined the MuLTEFire Alliance, which supports the Qualcomm-led technology to run LTE standalone in license-exempt bands.

Carney commented on the importance of a cellular/WiFi combination, saying: “This was the missing link for us – the on-ramp to the world’s data centers is mobile. The interesting component that Ruckus had – that the other wireless providers didn’t have –  was their focus on the cellular networks. They’ve figured out that the line is blurring between LTE, 5G and WiFi, and they have a product portfolio and strategy that firmly addresses that.” The company will also look for tighter integration of the latest WiFi generation, 802.11ac, with its wireline equipment, building on an existing two-year cross-sales partnership with Ruckus.

Brocade is looking for a combination of near term gains and future opportunities from its new subsidiary. Ruckus wrote on its website that it would bring “a high growth product category to Brocade’s networking portfolio and is expected to expand Brocade’s total addressable market by $5bn on day one, with additional TAM expansion as the OpenG in-building wireless opportunity evolves in the next couple of years.”

Among those immediate benefits will be the end-to-end portfolio, with the chance to increase its sales per carrier, and the ability to target verticals where Ruckus is strong, such as service providers and cities.

Brocade said in its statement: “Wireless is a critical access technology and the combination of Brocade and Ruckus creates a new type of pure-play networking company, with solutions spanning from the heart of the data center to the wireless network edge. In addition, after close, the acquisition is expected to accelerate cross-selling activities into the respective companies’ partner and customer bases, opening up new revenue opportunities for the combined company across a variety of verticals, including large enterprises, K-12 and higher education, government, hospitality, and service providers.”

Over the horizon, having a wireless access play should help Brocade develop more rounded platforms for emerging sectors such as smart cities and IoT, and it sees Ruckus’s expertise in metro networks, in-building wireless and the convergence of licensed and unlicensed spectrum as important ingredients to build a next generation enterprise offering and to play a role in 5G.

All this leaves Juniper isolated again, and it remains to be seen whether it will try to form a new WiFi alliance or acquisition. The most obvious candidate would be Aerohive Network, the only remaining pure-play WiFi provider, which has a reseller agreement with Juniper, and also with Dell and Alcatel-Lucent Enterprise (now part of Hauxin after it was sold off by ALU). Any of these three could bid for Aerohive, or for Extreme Networks, which though primarily a wireline player, has a strong wireless side to its offering. Further enterprise wireless consolidation can be expected, but there are not enough WiFi independents to go around now, so Juniper needs to be sure it is not left out in the cold.

Terms of the deal:

Brocade will pay cash and stock for Ruckus Wireless and expects the deal to be accretive to non-GAAP earnings by the first quarter of its 2017 fiscal year. Ruckus CEO Selina Lo will remain in that position and report to Brocade CEO Lloyd Carney.

Under the terms of the agreement, Ruckus stockholders will receive $6.45 in cash and 0.75 shares of Brocade common stock for each share of Ruckus common stock. Based on the closing price of Brocade’s stock on April 1 2016, this values Ruckus at a price of $14.43 per common share, or approximately $1.5bn. Net of cash acquired, the transaction value is about $1.2bn. The cash portion of the purchase price will be funded through a combination of cash on hand and new bank term loan financing.

The acquisition is subject to regulatory approval and is expected to close during Brocade’s third fiscal quarter of 2016.

The company’s board of directors has increased the authorization to repurchase its common stock by $800m, bringing the total remaining amount authorized under the program to approximately $1.7bn. This is intended to facilitate the repurchase of all shares issued in conjunction with the Ruckus acquisition.