Brocade: Deal or no Deal?
In an October 11 research note titled “Castles in the Air, Downgrading to Perform,” Oppenheimer & Co analyst Ittai Kidron throws cold water on expectations that Brocade will be bought anytime soon.
The speculation began last week, after The Wall Street Journal reported that Brocade was “quietly” shopping itself, and that Oracle and Hewlett-Packard could be potential buyers.
Later, Reuters reported more details: Brocade had in fact been trying to sell itself for several weeks, and HP had kicked the tires — going as far as to begin due diligence — but stopped short of making an offer for the company because they were only interested in certain assets. Then, Oracle CEO Larry Ellison publicly said his company wasn’t about to buy Brocade. Apart from HP and Brocade, analysts have speculated that IBM and Juniper Networks could also be interested.
Oppenheimer’s Kidron explains why Brocade might have trouble finding a buyer:
Brocade’s shares have risen sharply following WSJ reports the company has put itself up for sale. We, however, don’t anticipate a near-term acquisition. We view Brocade’s data center switching as the prime jewel, and it’s unlikely prospective buyers would pay a hefty premium for it solely.
Kidron then lists each potential acquirer and tells you why those companies won’t pick up Brocade. His comments are in quotes:
- HP: “Risks losing substantial revenue given Brocade’s OEM exposure and material overlap with ProCurve. Only needs a data center switch.” In other words, HP might lose the revenue that comes from Brocade’s partnerships with companies that sell its products. Also, HP and Brocade already make some similar gear.
- IBM: “Return to hardware business unlikely.” IBM has transformed itself from a hardware seller to a global services giant and we heard last week that IBM had decided not to look at Brocade’s books, although that could change.
- Oracle: “Publicly denied interest.” Anyway, Oracle is waiting to get regulatory approval from the European Commission to proceed with its acquisition of Sun Microsystems.
- Juniper: “Overlap with Foundry and too big to swallow.” Juniper is the No. 2 maker of network gear after Cisco and buying Brocade would add scale to its business, but would potentially bring integration challenges given Juniper’s size.
- Dell: “A wild card but busy with Perot acquisition ($3.9B), limiting bandwidth.” Dell might agree with that (see below).
Will Brocade find a buyer now?
One theory is doing the rounds about why the Brocade-shopping-itself story found its way into the press when it did. People familiar with the matter have told Reuters that Brocade has been up for sale for weeks; one person said Brocade began sending out feelers to potential acquirers nearly two months ago.
Hewlett-Packard is said to have looked at Brocade, as did Oracle. One source said on Monday that HP went as far as to begin due diligence. But from what I hear, no one has found Brocade compelling enough to shell out a few billion dollars on the spot. If anything, HP could be interested in some of the assets of Brocade rather than the whole company, which could be why it stopped short of making an offer.
Other potential acquirers include IBM and Juniper, which is the No. 2 network equipment maker after Cisco, but bankers and analysts think neither company is likely to step in. From what I understand, IBM has not looked at Brocade, although that could change any minute.
Given this picture, you’ve got to wonder if Brocade and/or Qatalyst Partners, the firm reportedly hired by the networking and data storage company to shop it, strategically leaked the news after failing to find a buyer. Companies and their advisers are known to use the media to float trial balloons, put pressure on potential acquirers to step up and make a bid, test investor appetite for acquisition ideas and even drive up the acquisition price.
One banker called it the “European” style of M&A, where “people constantly create and leak rumors to build the perception of action.”
Rumor or not, the market clearly wants a sale, going by the 19 percent jump in Brocade’s stock on Monday. A Qatalyst spokeswoman declined to confirm that Frank Quattrone‘s firm has been hired.
As for who might buy Brocade? We’re all working overtime to find out.
Brocade on the block?
The Wall Street Journal reports that the data storage equipment maker wants to sell itself. While Oracle and Hewlett-Packard are potential bidders, a deal is not imminent and Brocade might not even go ahead with a sale, according to the report.
Just a couple weeks ago, Brocade said it expected to turn the corner in 2010, with revenue exceeding Wall Street expectations. Better late than never. It reported a loss for the third quarter and a decline in revenue from the second quarter, and saw its stock punished by traders who had been expecting a turnaround sooner.
Brocade also said in September that its integration of Foundry Networks, acquired last year, was going as planned, and its sales partnership with IBM was beginning to yield more benefit. Just the kind of thing you’d want to hear if you were a Brocade shareholder contemplating a sale. Tech services mergers have been very hot of late, and the potential buyers — particularly Oracle — are not exactly poor or deal-wary.
