DealZone

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.

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.

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.