October 12, 2009 – The rumors are swirling that Brocade has quietly put itself up for sale, and the buzz will probably pick up at the Storage Networking World show in Phoenix this week. It all started with an article in the Wall Street Journal, “Network Specialist Brocade Up for Sale."
I don’t think Brocade will be acquired, at least not in the next year. The company’s in great shape from a financial and market-share perspective, and its value will continue to grow. Why sell now?
When these acquisition rumors start flying, I like to check out what the financial analysts have to say. And two of my favorites are Paul Mansky at Canaccord/Adams and Glenn Hanus (and colleagues) at Needham & Company. Both analysts focus on the storage industry.
Here’s a clip from Paul Mansky’s notes on the subject:
“We agree Brocade boasts strong strategic positioning . . . but we take issue with the prevailing argument the company is a near-term acquisition target. The independent OEM-centric business model is central to the company's ability to maintain its storage footprint during the pending protocol transitions, while the ‘anybody but Cisco’ story in Ethernet switching has not even begun to ramp. Ownership by a single OEM would hasten the demise of Fibre Channel (60% of revs) while limiting the Ethernet switch TAM expansion story. In our view, a sale today is like punting on second down.”
Or tossing a Hail May on first possession, first down.
More Mansky:”To the degree that there is an appetite to flesh out or build Ethernet switch product lines or gain access to closely held Fibre Channel technology, we view there to be several less expensive candidates. In Ethernet switching, this would include 3Com, Extreme and Force10. In Fibre Channel, we view QLogic as an eager seller of its switching product line -- possibly for as little as $300-350 million.”
I agree: There are much cheaper ways to get what Brocade has to offer, even if it means acquiring two companies.
Speculation centers on HP and Oracle as the most likely acquirers, but Needham’s Hanus puts a number of other vendors in the potential mix, including an “A” list of HP, IBM and Juniper, with Oracle and Dell as remote possibilities.
Commenting on the most likely suitor, Hanus (with colleagues Rich Kugele and Greg Mesniaeff) writes:
“Historically, HP has had a strong relationship with BRCD in the fibre channel arena. It is speculated that HP will eventually at least resell/OEM BRCD's Foundry related gear as HP defends itself against Cisco getting into the server space and resells less Cisco IP networking gear. HP has its Procurve switch line as well. If BRCD were to get acquired by IBM, it would be a big problem for HP as BRCD has 70% or so of the fibre channel switch market. Cisco is the distant #2 player with Qlogic #3. Obviously, HP does not want to source FC switching from IBM or Cisco. If HP owned it, a challenge could be some reduction in BRCD revenue base as HP competitors IBM/Dell (current large BRCD partners) would try and move away. Also HP does not have a reputation for paying up for M&A targets. Overall though, we see HP as one of the leading contenders if BRCD decides to sell.”
I’ll be at the Storage Networking World conference for the next couple days, and if anything interesting happens – regarding Brocade or otherwise – I’ll let you know.