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Brocade M&A Fire Still Burning

In addition to filing annual reports on Form 10-K and quarterly reports on Form 10-Q, public companies must report certain material corporate events on a more current basis. Form 8-K is the "current report" that companies must file with the SEC to announce major events that shareholders should know about.

Where There's Smoke There's Fire

On December 9th, Brocade filed a Form 8-K with including the following:

  • "... the restricted stock units may be subject to certain acceleration of vesting in connection with a change in control. For example, 50 percent of the restricted stock units may vest immediately upon the change in control, with the remaining 50 percent vesting upon the one-year anniversary of the change in control, unless vested earlier, in each case, in accordance with any applicable change of control agreement between grantee and the Company, and subject to continued employment through the applicable vesting date(s)."

Considering the recent maelstrom of speculation surrounding the possible acquisition of Brocade, the timing of this take-out provision is the smoke that tells us Brocade's M&A fire is still burning.

Brocade is Strategic

For product planners at Dell, HP, IBM, Juniper and Sun, the talk about fabric-based servers moved from philosophical discussion to urgent-must-take-action status when Cisco introduced the Unified Computing System. The presence of UCS from the networking giant is tangible evidence that a large piece of the future server value proposition will be intellectual property related to the network embedded in the server.

Blade server vendors pioneered embedded server networks by integrating adapter cards and switches from networking vendors. If Cisco is right, successful server vendors in the future will separate themselves from their competitors with their own sophisticated networking technology that is needed to connect virtual servers, networks and storage residing in environments ranging from a single chassis to part of a public cloud that stretches around the globe.

None of the aforementioned server and networking vendors, including HP with the acquisition of 3Com, has introduced their own FCoE intellectual property with which to compete against Cisco. I believe this is why all of these vendors still covet the Brocade portfolio that spans Ethernet and Fibre Channel, servers to fabric, and from core to edge.

Who Is Interested In What

The giant server and networking vendors are interested in Brocade, but who is interested in what? According to Paul Mansky of Canaccord|Adams, "In contrast to the prior set of would-be acquirers bandied about in the market, Hitachi's product positioning and m.o. fits the profile at least a bit more. Our biggest reservation is the deal would be half or more the size of Hitachi itself.....a much more aggressive move than we would expect. Though not outside industry norms, the timing (today) of Brocade's board-approved compensation plan...including take-out provisions...will nonetheless likely stoke the M&A embers."

Another possibility is Broadcom or Intel acquiring the Brocade host adapter business.  Although the market leaders in the 136 million ports per year market for Ethernet adapters based on traditional Ethernet, neither vendor has shipped an Ethernet adapter based on "Enhanced" Ethernet. A deal of this type makes sense because it would allow Brocade to focus on its core switch business and provide Broadcom or Intel with an instant presence in the nascent market for converged network adapters based on 10 gigabit Enhanced Ethernet. The M&A fire for strategic Brocade technology burns on.

Who do you think is interested in Brocade, and in what part?