Odds-Making: Is Brocade Really Bait For Dell? (BRCD, DELL, CSCO, HPQ)

Posted in General 
June 2nd, 2011

Brocade Communications Systems, Inc. (NASDAQ: BRCD) is seeing a price and volume spike this morning after an analyst named Paul Mansky at Canaccord Genuity noted that Dell Inc. (NASDAQ: DELL) should acquire the company.  Our own take is that Brocade should have already been acquired, but here it remains an independent company and Cisco Systems Inc. (NASDAQ: CSCO) and Hewlett-Packard Co. (NYSE: HPQ) continue to pose threats.

The research causing the spike noted the following:

  • Dell has been busily assembling a full IT stack aimed at re-aligning the company away from secularly less attractive legacy businesses (e.g., PC) and incrementally toward future growth in the enterprise.
  • With Dell’s acquisitions of EqualLogic, Perot and Compellent (among others), Dell now has a beach head in three of the four primary layers of this stack – storage, servers and services.
  • Networking is the one crucial piece that is missing, but Dell has some limited networking technology in-house.
  • Dell has clearly been seeing success cross-selling Ethernet switching with servers and storage
  • The company has $7B of net cash on hand prior to any additional raise, equal to 23% of its market cap.

The most important note is, “Not owning this technology puts Dell at risk of simply hopping from one commoditized business into another.” Still, the analyst noted that he has no knowledge of any discussions between or around Dell and Brocade, nor does he suggest that there are any discussion he is unaware of.

The research call is driving Brocade today.  At 11:10 AM EST shares are up 5.1% at $7.01 and shares hit a new 52-week high today at $7.20.  We have seen about 225% of normal trading volume as there have already been about 23.1 million shares traded and the day is not even half-way done.

Normally we would not cover one research report in detail.  The reason we do is that we have believed Brocade would be a target for many companies that want to stave off competition from Cisco, H-P, and a half-dozen other players.

If we had to make odds over any company which could or should acquire Brocade, Dell would be at the top of the list of companies which could benefit from such a deal.

JON C. OGG

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