Brocade: Oppenheimer Doubts Acquisition

A deal for Brocade (BRCD)? Such is the talk in a Wall Street Journal article this morning that has sent the company’s shares up $1.30, or 17%, to $8.99. However, Oppenheimer & Co. analyst Itai Kidron this morning throws cold water on the matter, saying a deal would require “material changes” the acquirer, and is therefore “unlikely near term.” Hewlett-Packard (HPQ) and Oracle (ORCL) are both mentioned as likely buyers in the story, according to “people familiar,” who say the maker of storage networking equipment is having itself shopped around by legendary tech banker Frank Quatrone’s new firm, Qatalyst Group. (Awful name, that.)

The Journal doesn’t mention a price (Brocade has a market cap of $3.8 billion), but cites the substantial premia offered recently in tech M&A, such as Dell’s (DELL) $4 billion buy of Perot Systems (PER), Xerox’s (XRX) $6.4 billion deal for Affiliated Computer Services (ACS), and Cisco Systems’s (CSCO) $3 billion purchase of Tandberg.

Problem is, there’s a “huge overlap” between Brocade’s networking equipment and HP’s “ProCurve” line of data switches, and Brocade gets 10% of revenue each from IBM (IBM) and Oracle, so a buy by HP would involve Brocade losing 20% of revenue. Likewise, Brocade would be “a nice addition for IBM” but would involve losing 20% of revenue coming from HP and EMC (EMC). An IBM purchase would mean the end of reselling gear from Cisco and Juniper Networks (JNPR), but Kidron doesn’t think IBM wants to get “back into the hardware business.” Dell is the “wild card,” because Brocade would help Dell gain some credibility selling into corporate data centers, but it would be tough for Dell to do another big deal after announcing Perot. Last, if Oracle were to make a move, it would “signal a much broader consolidation effort in hardware and software,” thinks Kidron.

Kidron has an “Outperform” rating on shares of Brocade.