Is Brocade once again for sale?

Potential suitors are likely few

Two years after attempting to find a suitable buyer, storage switch and router maker Brocade Communications Systems may again be looking to sell itself to the highest bidder.

According to the Wall Street Journal, Brocade has again begun to try to find a buyer through Qatalyst Partners, the same investment bank it turned to in 2009.

Brocade had no immediate comment on the report.

In October 2009, Brocade hired Qatalyst to drum up interest among possible buyers. Sources indicated at the time that Hewlett-Packard and Oracle both showed interest but decided to passed.

The fact that the Journal has again published an article on the potential sale is "no accident," according to Brian Babineau, an analyst with market research firm Enterprise Strategy Group.

Babineau said a story in the Journal about a company shopping itself around can only have one of two purposes, both of which are intentional: The company is either just trying to attract some initial attention or it has one or two suitors and is trying to pique the interest of others -- and thereby set up a bidding war. By getting the word out, Brocade could, for example, catch the eye of an overseas corporation that may not have been aware Brocade was on the market.

"If this information got out there by accident, it could screw up negotiations," Babineau said. "That's why these things are rarely accidents."

This time around, HP would be far less interested in Brocade because it announced its purchase of switch and router maker 3Com in late 2009. Similarly, IBM is unlikely to be interested in Brocade because it purchased Blade Network Technologies in 2010.

More likely suitors include Dell and Oracle. Dell recently announced an end to a decade-long reseller agreement with storage giant EMC. That relationship allowed Dell to develop its own mature storage business and helped EMC move downstream into the small-to-midsize business market.

"Oracle is a great operations shop. If they buy Brocade, I think Brocade would be successful," said Enterprise Strategy Group analyst Jon Oltsik. "Oracle is good at winnowing down product lines and parts and packaging things on the cheap."

But Brocade isn't the only game in town. Oracle could choose to purchase Enterasys Networks, Extreme Networks or Arista Networks, to name a few.

In 2010, Dell purchased Force10 Networks, a maker of routers for data centers and cloud computing systems, but it could still have an appetite for storage switches.

In order to sweeten its own market position, in 2008, Brocade purchased Foundry Networks, giving it IP networking technology that afforded it a leg up in the server networking market and put it in a stronger competitive position against networking equipment maker Cisco Systems.

Over the past decade, Cisco has added a line of storage switches and routers that make it a significant player in the storage business. Two years ago, through a joint subsidiary called The Virtual Computing Environment Co. (VCE), Cisco and EMC strengthened their alliance, and they have jointly developed a server, network and storage system called vBlock. EMC and Cisco's VCE venture has continued to grow.

Over the past few years, Brocade's stock price has taken a couple of cliff dives. In 2008, the stock fell from $7.49 a share in September to $3.09 in October. It ended up at a low of $2.16 a share in March 2009 before rebounding to $9.41 by October 2009.

Then, earlier this year, the company's stock price again declined by almost 50% in a matter of a month, from $6.75 a share in July to $3.42 in August. The stock has since steadily climbed its way to just above $4.50 a share.

Still, any potential suitor would have to be of substantial size. Brocade has a market capitalization of about $2.2 billion.

Oltsik said Brocade also still has a lot of debt from its purchase of Foundry, so any company purchasing it would also incur that debt.

EMC may be interested in Brocade, but that deal would be a long shot, according to Oltsik. EMC does not have an application server business, and Brocade's Foundry unit would be useless to it. Acquiring Brocade would also strain EMC's relationship with Cisco, Oltsik said.

"I just don't see it," Oltsik said. "I just don't see a scenario where someone buys Brocade."

Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at @lucasmearian, or subscribe to Lucas's RSS feed . His email address is lmearian@computerworld.com.

Copyright © 2011 IDG Communications, Inc.

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