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$180 million Extreme-Enterasys merger combines complementary vendors

Shamus McGillicuddy

Extreme Networks has acquired rival Enterasys Networks for $180 million.

The merger will bring together a company best known for data center networking -- Extreme -- with one whose strength is in campus networking and wireless LANs, said Bob Laliberte, senior analyst at Enterprise Strategy Group.

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Extreme's recent deal with Lenovo to sell packages of servers and switches point to Extreme's data center focus, he added.

"One area that Enterasys has always been very strong in is the campus side, with wireless networking and management. This creates a more end-to-end, full-service network equipment provider," he said. However, both companies have been trying to expand beyond their core strengths in recent years. Enterasys in particular has been introducing data center switching platforms. It remains unclear how the Extreme-Enterasys merger will affect those aspects of the individual product lines.

Extreme gains ASIC R&D and a complementary sales channel

Extreme and Enterasys each records roughly $300 million in annual revenue. The combined company will have more financial resources to pour into marketing and research and development, said Extreme CEO Chuck Berger. He said a $600 million company will have the resources to compete with larger competitors. In fact, Extreme claims the merger elevates it to top-four status in the networking market.

Enterasys bolsters Extreme in some key areas, particularly around silicon. Today, Extreme relies purely on merchant silicon for its switch engineering, while Enterasys has devoted significant resources to custom silicon design.

"[Enterasys has] a network management suite of products that complements ours very well," Berger said. "They also have some key ASIC [application-specific integrated circuit] technology that we don't have at Extreme."

Enterasys's ASIC, the CoreFlow2 processor, is a programmable chip with Layer 7 visibility, which enables more sophisticated applications of Quality of Service and access control. Enterasys has also recently touted CoreFlow2's programmability as an avenue toward software-defined networking.

Extreme and Enterasys also complement each other in the sales channel. Both companies use two-tiered sales channels. While they have some overlap among distributors, they have almost no common channel partners, Berger said.

Extreme-Enterasys merger plan

Extreme and Enterasys have both emphasized the openness of their network operating systems, which should bode well for combining their platforms, Laliberte said.

Berger said Extreme will support both companies' product lines to ensure no disruption for customers. In the long term, the combined company will merge individual network operating systems into a single platform, he said.

"Over the next 18 to 30 months, we will work on XOS [Extreme's operating system] to enable it to run on both Extreme and Enterasys hardware," Berger said. "Once we execute on that, it will be very easy for customers of either company to buy the other company's products. We'll be merging the two OSes. [Enterasys has] some features around security and packet inspection that we don't have. We'll be porting those features into XOS. But the upgrade for either company's customers will be as seamless as if they are upgrading to the next software release."

On the wireless-networking side, Extreme has an existing OEM relationship with Motorola. The future of that relationship is uncertain for now, but it's clear that Enterasys's wireless LAN business is a real strength. It has won some high-profile wireless customers, including the New England Patriots and the Philadelphia Eagles of the National Football League, Laliberte noted. These deployments demonstrate the vendor's ability to provide wireless networking in extremely challenging, high-density environments.

Gores Group, the private equity firm that sold Enterasys to Extreme, positioned Enterasys as a sister company to another asset -- Siemens Enterprise Communications, a telephony and unified communications company. Indeed, Enterasys inherited its wireless LAN portfolio from Siemens. Berger said Gores largely allowed the two companies to operate as independent entities. Enterasys's relationship with Siemens will be mostly severed as a result of its acquisition by Extreme, although Siemens will probably continue to serve as a reseller.

The companies said the acquisition will close in the fourth quarter, following regulatory approvals.


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