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Brocade's Virtual Bet

Brocade's Virtual Bet The Rhapsody acquisition is a defensive, risky move - but it's the right one

Brocade Communications Systems Inc. (Nasdaq: BRCD) has placed its long-term prospects ahead of short-term concerns about its stock by acquiring Rhapsody Networks and that's the right decision (see Brocade Scoops Up Rhapsody).

Brocade's stock is getting whipped like a sick mule because of this deal. Several Wall Street firms downgraded the stock after the acquisition was announced. They don't like it because it's going to dilute the stock (Brocade is trading 10 percent of its outstanding shares for Rhapsody) and Brocade says it won't see any revenue from it until the back half of 2004 (see Brocade Stock Not Rhapsodic).

Yes, it's a risky and defensive maneuver, and time will tell how it all pans out. But all things considered, Brocade's purchase of Rhapsody was swift and smart.

First of all, the news shouldn't have come as a surprise to readers of Byte and Switch: We reported that Brocade was planning to buy Rhapsody three weeks before the deal was announced (see Sources: Brocade to Buy Rhapsody).

Really, Brocade actually didn't have much choice but to acquire Rhapsody or one of its ilk, because it was staring down the barrel of Cisco Systems Inc. (Nasdaq: CSCO). And according to many in the industry, Rhapsody was the best of the lot. "Of all the intelligent switch guys, I think Rhapsody was the crown jewel," says Steve Duplessie, senior analyst at The Enterprise Storage Group Inc.

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