Is Brocade Going Private?

Brocade Communications Systems Inc. (Nasdaq: BRCD) may be mulling a move from publicly traded company to private firm, sources say.

Several financial analysts say they've heard speculation that the Fibre Channel firm may be thinking of selling out to a group of private equity partners. But no one can say for sure that a deal is imminent.

"It doesn't surprise me to hear this again. Contacts tell me Brocade is pursuing some outreach to major private equity firms," says one analyst, who asked not to be named.

"I heard they're shopping, but it could be rumors from hedge fund managers," cautions Dan Renouard of Robert W. Baird & Co. Inc.

Brocade media relations director Leslie Davis says the company can shed no light on the speculation. "I know those rumors are out there," she says. "But there's nothing I can add."A few industry sources say going private makes sense for Brocade. The move would allow it to deal with a slew of messy problems while remaining outside the spotlight that shines on public companies. Brocade is currently under investigation from the Department of Justice and Securities and Exchange Commission (SEC) for the way it accounted for stock options from 2001 to 2004, facing delisting by Nasdaq for failing to file earnings reports on time, and trying to get out of a deal to pay CEO Greg Reyes as a consultant. (See Brocade Notified by Nasdaq , SEC Gets Formal With Brocade, and Brocade Blasts 'Consultant' Reyes.)

Brocade is also in a sales slump, losing share to rivals Cisco Systems Inc. (Nasdaq: CSCO) and McData Corp. (Nasdaq: MCDTA) over the past two quarters. (See Brocade Bloodied Again and Brocade Bungles Quarter.)

Brocade has requested an extension until Nov. 15 to file reports for its fiscal 2004 and second- and third-quarter fiscal 2005 reports that were due Sept. 30. Sources close to the company say Brocade executives expect Nasdaq to grant the extension, but the companys other problems remain.

As a private company, Brocade could work on straightening out its problems without having to worry about alienating investors. Then again, taking such a step could scare customers into the arms of Cisco and McData.

If the firm is in fact exploring a move to private ownership, it would be following in the footsteps of several companies in the last couple of years:

At least one of the analysts we've spoken to says Brocade has been in touch with KKR and Silver Lake. Calls to partners at both firms went unanswered.

As to pricing, one analyst says that if Brocade didn't have its reporting woes, it could fetch a price near $1 billion. Given the problems, that could come down considerably, unless the buyer could be sure that any financial impact from the reporting snafu would be manageable.

— Mary Jander, Site Editor, and Dave Raffo, Senior Editor, Byte and Switch.