How a Vyatta Acquisition Could Impact AT&T

AT&T (T) is acquiring the Vyatta network operating system from Brocade Communications (BRCD). Although the financial terms of the transaction have been kept secret, what AT&T is aiming for with a Vyatta buyout is not so secret.

First, AT&T would acquire Vyatta and its associated assets, which include patents and patent applications. The Vyatta platform includes the vRouter product line as well as virtual network functions (or VNFs) and its distributed services platform.

The package that AT&T would get also comes with software licenses, software under development, and talent. Brocade’s employees, who are part of the Vyatta business, would be joining AT&T.

AT&T is hoping for multiple synergies from the acquisition of Vyatta. For example, Vyatta would bolster AT&T’s enterprise-focused operations by expanding its capacities in SD-WAN (software-defined wide area network) and white box solutions. Vyatta is also expected to accelerate the virtualization of AT&T’s network, which would lead to more operational agility and cost savings.

AT&T is gearing up to have 75% of its network virtualized and software-controlled by 2020. By the end of this year, AT&T expects 55% of the network to be virtualized.

In terms of pursuing enterprise spending on network solutions, Vyatta is expected to boost AT&T’s competition against Verizon (VZ), which recently added Nokia (NOK) competitor Ericsson (ERIC) as its SD-WAN customer.

AT&T’s Business Solutions revenues declined to $16.8 billion in 1Q17 from $17.6 billion in 1Q16, as shown in the chart above. However, earnings margins in the segment jumped to 39.6% from 28.7%.