Is Dell (Nasdaq: DELL) about to buy Brocade Communications (Nasdaq: BRCD)?

That's the question that Cannacord Genuity poses -- without actually posing -- in a recent research note on Dell. Last week, the analyst pointed to a series of moves by the personal-computer maker that appear to track toward a bid for Brocade. According to Cannacord, Dell:

  • is moving away from PC production, and toward becoming a full-service IT provider to corporate customers.
  • has already acquired companies providing storage, servers, and IT services.
  • and now lacks only one "crucial piece" of the puzzle: networking.

According to Canaccord, Brocade is the most logical company to fill Dell's single remaining capability gap and to level the playing field as Dell competes with IT giants IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ). Plus, with the $7 billion Dell has in its pocket, Brocade's $3.3 billion market cap would permit it to buy the company two times over. (In contrast, Canaccord notes that the next most likely suspect is Juniper Networks (NYSE: JNPR), which sells mainly to service providers instead of enterprises -- and  would cost more than twice as much as Dell has available.)

So, this deal's a lock, right?
After ruminating on why it thinks Dell will buy Brocade, Canaccord goes out of its way to disclaim "knowledge of any discussions between the two companies." So far, this is all just analytical navel-gazing. Regardless, the more I look at the numbers, the more I think Canaccord might be onto something.

Consider: On the surface, Brocade doesn't look all that attractive. Its GAAP profits aren't exactly roaring. At 33 times earnings, Brocade looks like one pricey prize. On the other hand, if you dig just a little deeper into Brocade's cash-flow statement, you'll find a company actually generating free cash flow at 2.5 times the rate it reports net income. Given this free cash flow, I look at Brocade less as a 33 P/E stock and more as a company selling for 13.3 times the amount of cash profit it generates in a year. And Brocade is expected to grow profits at 10% per year over the next five years.

Foolish takeaway
Even this price may not look like a screaming bargain to you and me. But that 10% growth rate could look awfully attractive to Dell, pegged for mere 6% growth itself.

Is Canaccord right? Is a merger in the offing? Add Brocade and Dell to your Watchlist and find out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.