Brocade Acquisition Rumors Resurface
Posted by
Sharon Fisher
January 12, 2012
Brocade Communications Systems is reportedly in negotiations with a private equity firm for a potential acquisition, Reuters said this week. According to reports in the financial press, the storage and networking infrastructure vendor has been working with Qatalyst Partners, the boutique investment bank run by Frank P. Quattrone, for two years to shop itself around, including several failed acquisition attempts with companies such as Hewlett-Packard. However, an analyst who follows the company believes that such an acquisition, if it occurs, would have much less effect on users than would an acquisition by Oracle, which is another rumor going around.
"I do not think that Brocade should be acquired by a vendor but should stay independent," says Stuart Miniman, principal research contributor at Wikibon, a Boston-area consultancy. "Moving to private equity would free Brocade from Wall Street pressures. The business is still solid and Brocade is generating a lot of cash. This could be optimized by a private equity firm," he says. Moreover, because companies similar to Brocade have already been acquired, such as Force10 Networks by Dell and 3Com by HP, there are fewer potential buyers, notes the San Jose Business Journal.
Back in June when the most recent rumors of Brocade's imminent acquisition surfaced, Dell was expected to be the buyer. It was expected that the addition of "the jewel among independent, pure-play data center networking vendors" would immediately propel Dell into the leadership tier of cloud stack and enterprise networking providers. A month later, Dell instead bought Force10, an equipment vendor that specializes in high-performance computing.
In terms of Oracle, Bloomberg quoted two financial analyst firms as saying that Brocade could give Oracle a networking product it currently doesn't offer to businesses and enable it to better compete with Cisco. IBM has also been suggested as a possible suitor. However, some analysts say neither of those companies would be interested in Brocade because they already have a significant customer overlap with them.
The problem with Brocade being acquired by another vendor is that it is currently considered vendor-agnostic, selling its equipment to a variety of other networking vendors. An acquisition by another vendor could damage some of those relationships, Miniman wrote in summer 2010. "If Brocade was to be acquired by IBM or Dell, their relationships with the other server and storage vendors would be damaged and could lead to QLogic gaining further inroads into the market, which is currently dominated by Cisco and Brocade," he wrote at the time. Miniman has stated that he still stands by this today.
Because Brocade has more than doubled its free cash flow in the past five years, it could command as much as $8 per share, a premium of 40%, according to Bloomberg. Moreover, the stock still trades at 7.7 times its amount of free cash flow, which is below the level of similar publicly traded companies, which have a median of 17 times the amount of free cash flow, Bloomberg said.
Upon the rumors, the company's stock went over $6 a share on Wednesday, up more than 3%. The stock price gradually drifted downward as the day progressed. Brocade is up more than 80% since it hit a 52-week low of $3.18 in early August, but it remains below its 52-week high of $7.30 in early June. Neither Brocade nor Oracle is commenting to the financial press.
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