Brocade Buyout Chatter Heats Up

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Inquiring minds want to know – just how long will Brocade Communications (Nasdaq: BRCD  ) have to sit in the front yard bearing a "for sale" sign without attracting a buyer? Possibly not much longer.

Last night details emerged that the world's largest private-equity firm, Blackstone Group (NYSE: BX  ) , could be considering a takeout offer for Brocade. While these are unconfirmed rumors as of right now, they are likely to put some zip into Brocade's valuation.

This same report from Bloomberg also went on to mention that smaller private-equity firm Thoma Bravo attempted to purchase Brocade, but simply couldn't get the leverage to support such a large buyout. With unsubstantiated claims still flying, a person familiar with the situation also noted that Dell (NYSE: DELL  ) passed over Brocade last year in favor of purchasing Force10 Networks.

Are you confused yet? Well relax, because that's a lot of information and might-be's to ingest all at once.

The real takeaway here remains the same -- that Foundry Networks products, which Brocade acquired in 2008, are the real allure of any takeover bidder. Brocade's networking switches became obsolete with the introduction of Fibre Channel over Ethernet switches by Cisco Systems (Nasdaq: CSCO  ) . There is residual revenue and profitability in these switches, but its customers are beginning to make the changeover. This was, I feel, the real reason Brocade put itself up for sale in the first place.

It has strong supply partnerships, as I've noted recently with IBM (NYSE: IBM  ) , Hewlett-Packard, and Dell. But we learned today that Dell appears to be out of the running and Hewlett-Packard exited the hardware business altogether last year. This leaves just IBM as a potential suitor for Brocade aside from private-equity firms.

Brocade's valuation will also play a defining role in whether or not it gets purchased. A few months ago, when the stock was trading w ell below $4, many, including myself, felt the rewards far outweighed the risks. With a closing valuation yesterday of $2.65 billion and the stock headed up another 4% in after-hours, the prospects of a premium on any buyout offer are quickly flying out of the window.

I stand by my recommendation in January that Brocade remains a buy, but investors should really temper their expectations. Even if Brocade doesn't get a deal done in 2012, it still offers value with a forward P/E of just 10 and a price-to-cash-flow of 6.5. Both of these metrics are considerably lower than its five-year averages.

Keep up on the latest Brocade buyout chatter by adding it to your free and personalized Watchlist and feel free to post your thoughts on who might purchase Brocade, if anyone, in the comments section below.

Also, if you're tired of the Brocade soap opera, consider downloading a copy of our latest special report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution." This report names three companies raking in the dough off of the mobile and tablet sectors and, best of all, it's completely free for a limited time. Don't miss out!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He enjoys trying to predict who buys whom next. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong

The Motley Fool owns shares of IBM and Cisco Systems, and has created a bull call spread position in Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Dell. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that'll never be obsolete.

Read/Post Comments (5) | Recommend This Article (2)

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  • Report this Comment On February 03, 2012, at 6:28 PM, benca101 wrote:

    I'm sorry, but Cisco's FCoE switches do not make brocade's SAN switches obsolete. I think Brocade takes it on the chin somewhat due to investors ignorance as to what Brocade actually makes.

    FCoE is atrocious in implementation and management. No one is actually going to it outside of new deployments - even then - are you aware that FCoE can't perform switch hops rendering a no-go for many organizations?

    Brocade makes the best SAN switches in existence. I have to use Cisco MDS and Brocade switches, and Cisco clearly entered the SAN market as a reaction - their MDS switches are so poor that I find myself questioning the intelligence of the buyer (buy Cisco is the knee-jerk reaction by the same people who simply buy Microsoft, lucky CIOs with an unlimited budget.)

    Brocade's SAN products are easy money, with a long life ahead (do you have any clue how many orgs are still on 2Gb fibre channel for godsakes!?)

    Foundry is crap. This is well known, and it's a Klayko embarrassment that he killed the company investing in Foundry. He didn't invest in it, he rescued it.

    A smart PE firm would buy in spite of Foundry. If I could, I would buy Brocade, sell of Foundry to another fool, then sit on Brocade's SAN products enjoying easy cash for at least the next 5 years.

  • Report this Comment On February 03, 2012, at 7:56 PM, MarketIntell wrote:

    Agree with benca101 that Brocade is no dead horse in either of its major product categories, thought it does seem better positioned in SAN than Ethernet. Also, I'm waiting for anyone to back up the widespread claims that HP is completely out of the hardware game. Whereas there were major questions about their direction, there's nothing definitive I'm aware of and for now they continue to be a major player in PCs, servers, storage, printers, etc.

  • Report this Comment On February 03, 2012, at 9:02 PM, Kenny1999 wrote:

    The little investigating I've done into recent network redesigns - especially where there is a mix of Fiber channel and ethernet - the Brocade products seem to be a winner. It looks like there are lot of customers who want to flattened their corporate networks and tie together the Storage Fiber Channel and the ethernet worlds. Brocade appears to make great products that fit this need and these products appear more versatile that CISCos - (I'm no expert).

  • Report this Comment On February 05, 2012, at 10:02 AM, JoeP wrote:

    I have no idea where this writer gathered his information about HP and Brocade. HP continues to be a large part of Brocade's business. I think that the author's statement about them exiting the hardware business might come as a surprise to anyone working in HP's ESSN organization.

    Also, has he ever heard of companies like EMC and Hitachi. Wow, the research done for this article is well below par.

    The FCOE comments are pretty uninformed as well, stop reading all the Cisco generated FUD please! Multi-hop, failover...all kinds of issues still exist with that technology.

    Brocade certainly faces a number of business issues, but none of the real issues are articulated very well here.

  • Report this Comment On February 08, 2012, at 4:32 AM, DiggerandSydney wrote:

    I agree with all of the above and am alarmed at the amount of misinformation in this article. If you want to claim to offer an opinion then at least get some facts straight in order to offer it!!

    1. Cisco has done nothing that obsoletes anything Brocade do. FCOE is a red herring and really offers a stepping stone to bigger Data Centre Network options/offerings and any stats that Cisco offer ignores the fact that there is no native FCOE storage on the market to attach to their spurious and unsubstantiated market figures. The consensus of the piece that matters is that Brocade has UPWARDS of 70% of the Global FC SAN market and in reality Cisco is shrinking. This market is worth close to $2bn.

    2. HP out of the hardware business? What about their acquisitions of 3Par and 3Com (is there some thread with the "3"?!). The ability to offer a complete stack is becoming paramount to the largest vendors such as HP, IBM, Dell and Cisco.

    3. I terms of potential suitors for Brocade, Dell will soon find Force 10 to be an even bigger crock than Foundry has been for Brocade so there may be a rebound, but not for 6 months +; EM will realise sooner rather than later that VCE is a one way street heading only to Tasman Drive via NetApp. hey are waking up to the Data Centre Network Fabric idea and can see that Brocade actually offers a lot more scale, flexibility and value to them than a lock-in with Cisco. What about Intel as well? Finally, IBM seem to have made a bed with Juniper but this excludes the Storage piece so there may be some kind of 3 way play here as well.

    If I were Sean Williams assessor, I would give him a 1 out of 10 for completing the assignment. He would have to redo it, this time with an attempt to actually understand what he is writing about and collect some corroborative information.

    P.S. This means ignore anything that Cisco put out claiming to be "market statistics"

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