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Brocade Communications Systems (Nasdaq: BRCD ) is riding high today on buyout rumors. The Wall Street Journal's usual unnamed sources say that IT giants like Hewlett-Packard (NYSE: HPQ ) and Oracle (Nasdaq: ORCL ) might buy the little specialist in data storage networking, and the stock jumped 16% on that report.
There's a lot to like about Brocade. The company has a solid product portfolio. Within its niche, Brocade is a serious rival even to networking master Cisco Systems (Nasdaq: CSCO ) . In fact, Brocade's sales weathered the storms of 2009 better than Cisco, and also outperformed storage titan EMC (NYSE: EMC ) . And that's before you take Brocade's smart acquisition strategy into account.
After today's 16% pop, Brocade's share price has more than tripled in 2009. Even so, the stock does not look expensive by traditional metrics like price to forward earnings, and the PEG ratio is hovering right around the perfectly reasonable 1.0 mark. HP and Oracle certainly have shown that they're willing to cut the occasional deal. If Oracle's pending acquisition of Sun Microsystems (Nasdaq: JAVA ) passes antitrust reviews in Europe, then both of the rumored buyers have large existing relationships with Brocade. Then again, so does IBM (NYSE: IBM ) -- another cash-rich and acquisitive tech giant. However, it remains to be seen how much any of these companies want to increase their newfound rivalry with Cisco by pushing further into the networking market.
The WSJ notes that there is no deal on the table yet, but Brocade is holding a strong hand and has several potential suitors. Don't be surprised if you see an actual buyout offer in the coming weeks. And congratulations if you bought in the last time we reminded you of Brocade's strength -- you're sitting on a market-beating 42% gain today.