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If Brocade Finds a Partner, It'll Be a Private Affair

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Is this the song that will turn wallflower Brocade Communications Systems (Nasdaq: BRCD  ) into the belle of the buyout ball?

The maker of networked storage systems has been looking for a buyer since 2009. But nobody has stepped forward to ask for the company's hand in more than 27 months, and at the start of 2012, share prices were down nearly 27% from the original buyout-boosted levels.

But according to separate reports from Reuters and The New York Times, Brocade's dog days may be over. Both reports quote unnamed insiders saying that private equity investors are kicking the tires. Frank Quattrone's Qatalyst Partners is said to lead the hunt for investors.

Analysts have noted that potential buyers IBM (NYSE: IBM  ) , Hewlett-Packard (NYSE: HPQ  ) , and Oracle (Nasdaq: ORCL  ) share too much of Brocade's distribution load to be realistic bidders — the minute any one of these three buys the company, the other two would probably tear up their Brocade contracts so as not to help a direct competitor.

All tree of those tech giants are well-known buyout barons, but they all have to sit out this particular dance. So that leaves the private buyout hawks on the table.

Early rumblings in this direction started last August, when noted activist investor firm Elliott Associates disclosed a sudden huge 10.5% stake in the company. Earlier, an unsolicited bid from Elliott started a bidding war for software company Novell that culminated in a slightly more generous sale to a different equity consortium.

But Elliott's interest was lost in the noise from a horrific pre-earnings guidance cut. At the end of August, I told Brocade investors to hang on to their shares as the company asserted its place in the Big Data trend, even though buyout bidding wars didn't seem likely anymore.

Brocade shares have climbed 67% since then. It's not a super-opportunistic buy anymore, but still a sensible one for the right buyer. With a forward P/E ratio of just 9.9 and plenty of positive cash flows running under the bridge, Brocade fits the profile for a leveraged buyout opportunity.

None of the suggested dancers are talking to Reuters or the Times, and this is far from a proposal on bended knee. Don't back the truck up here; just add Brocade to your Foolish watchlist to see what happens next.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Oracle and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders's holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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