Cisco's foray into servers may trigger M&A wave

NEW YORK, USA:Cisco Systems Inc's foray into the computer server market will pit it against longstanding partners IBM and Hewlett-Packard, and could trigger a new wave of dealmaking in the tech industry.

Cisco is set to introduce on Monday a blade server - a powerful server computer designed to save space - and a range of computing products for data centers, using technology from storage company EMC Corp and virtualization software maker VMware Inc.

Other Cisco partners include Intel Corp, Microsoft Corp and BMC Software Inc, according to a person with knowledge of the announcement, who was not authorized to speak publicly about it.

As the dominant provider of routers and switches that direct Internet traffic, Cisco's big advantage is that its network equipment is already ubiquitous in data centers.

Analysts expect the company, led by Chief Executive John Chambers, to combine its new servers with software and storage products to help customers manage their data centers more cheaply and efficiently. Cisco declined to disclose any details of the move, which is internally code-named California.

By expanding into servers, Cisco would be mounting a direct challenge to IBM and HP, which have helped to sell Cisco's network equipment to mutual customers.

Analysts said IBM and HP may pursue alliances or acquisitions to compete with Cisco.

"The possibility is that Cisco could end up squeezing out IBM, Hewlett. I think Hewlett and others have been ... thinking about alternatives," said Avi Cohen, an analyst at Avian Securities.

Companies such as data equipment maker Brocade Communications Systems Inc may become acquisition targets, he added. Brocade declined to comment until Cisco's announcement.

Other analysts said infrastructure software maker Citrix Systems Inc and small companies specializing in network optimization, such as Blue Coat Systems Inc and Riverbed Technology Inc, may also come into play as competition heats up in the data center market.

Talk that Cisco may buy VMware has repeatedly surfaced among traders, although EMC Chief Executive Joseph Tucci told Reuters this week that the company did not plan to divest its majority stake in the software company.

VMware makes software that allows users to access data and applications from remote data centers that share resources.

Battle for data centers

Cisco's main rival in network equipment, Juniper Networks Inc, could take advantage of the growing competition with IBM and HP. Late last month, Juniper said it would work closely with IBM to boost its position in data centers.

The announcements underscore the focus on data centers as a new battleground for equipment vendors as companies look for ways to deal with rapid growth in Internet traffic, rising energy bills and strained budgets.

"The battle for the next-generation data centers will be competitive, and we view it as a key driver for tech stocks over the next two to three years," said UBS analyst Nikos Theodosopoulos, adding that he expected more deals.

HP and IBM declined to comment on the impact of Cisco's move ahead of its March 16 announcement.

Despite the consensus that Cisco's move will lead to more competition, some analysts noted it was also just an extension of complex relationships in the industry, as companies try to offer comprehensive sets of products and services while simultaneously trying to edge out rivals.

For example, Cisco has been competing more directly with Microsoft as they both expand their range of products that tie together e-mail, phones and other communications tools.

Morgan Keegan analyst Simon Leopold said HP has also encroached on Cisco's territory of ethernet switches, which are networking equipment used to connect multiple computers. And HP last year acquired tech outsourcing company EDS, an IBM rival.

Concerns about rivalry with HP and IBM may be overdone, he said. "Some may worry about the risk of taking on these two as competitors, but we consider this a normal part of business," he said. "Companies will both partner and compete."

Some analysts also warned against expecting Cisco's move to yield immediate and significant changes, citing the weak economy. Others said the recession could provide an incentive for companies to seek energy-efficient products.

"Data center guys are very slow to adopt new initiatives. They do a lot and lot of testing," said Avian's Cohen. "In this environment, people tend not to spend too much money and time testing new solutions."

Cisco shares have fallen around 40 percent from a year earlier amid worries of weaker technology spending.