Brocade and Its Sales Agent Try to Drum Up Buyers

Frank Quattrone and his Qatalyst Group apparently are shopping Brocade Communications to interested bidders, according to a report from the Wall Street Journal. Candidates likeliest to acquire Brocade are HP and Oracle, “people familiar with the matter” informed the WSJ.

While HP would seem the most likely candidate — if only because it’s positioning for a heated battle against Cisco to provide integrated servers, storage, and networking gear for converged data centers — Oracle also could take a run at Brocade.

Presuming its acquisition of Sun goes through, Oracle is poised to emerge as another vendor of comprehensive converged-data-center solutions. Oracle would lack the networking gear, but the company might be looking at espousing the Solaris-centric vision for across-the-board datacenter hardware that Sun CEO Jonathan Schwartz promulgated earlier this year. It’s possible that Brocade could fit into that vision.

Whenever you read these types of reports, though, you have to ask the old forensic questions: Who benefits from leaking the information, and why are they leaking it?

In this case, it’s clear that somebody from Brocade or from Quattrone’s boutique investment bank is responsible for an intentional leak. Both stand to benefit from the information disclosure, whereas the other potential suspects have nothing to gain.

Oracle and HP, as prospective buyers of Brocade, would have no motive to disclose their intentions. My guess is that Quattrone or Brocade is trying to drum up interest from additional companies. Perhaps both are concerned that only one of the two stated candidates is genuinely interested. If that’s true, Quattrone and Brocade will be trying to create an auction dynamic — with at least two interested parties aggressively pursuing the prize — to get full value at the negotiating table.

I don’t think Cisco would buy Brocade — and I doubt the anti-trust regulators at the Justice Department would look favorably on such an outcome — but it’s possible that a private-equity firm or a dark-horse candidate could emerge.

IBM, for example, might review its decision to eschew networking hardware, which it views as ripe for commoditization, and decide that owning data-center switching products might be preferable to reselling those made by others. At this point, however, IBM doesn’t seem inclined to adopt that position.

Regardless of where Brocade eventually lands, its backers, in hiring Qatalyst, have made a definitive decision to sell. They’re nominally hedging their bets, saying publicly that a sale is not a foregone conclusion — and that any sale that might transpire will take time to complete — but a company doesn’t hire an investment bank as a sales agent if it has no interest in finding a buyer.

For its part, Qatalyst needs the M&A action. Quattrone made news earlier this summer when he lamented the moribund IPO market.

2 responses to “Brocade and Its Sales Agent Try to Drum Up Buyers

  1. Regarding the timing of this leak, perhaps Brocade had a bad quarter and they want to get this news out before they announce Q4 earnings in a couple weeks. It’s an effective way to distract the market from the bottom line, at least in the short term.

    If earnings were really bad and the stock fell before Brocade was in play as an acquisition target it would weigh down the eventual price of the deal. Better to get this news out there before earnings and use it to prop up the stock.

  2. It could be, but that would be nothing more than a fleeting distraction, as you readily concede. In two weeks, we’ll all know whether Brocade had a bad quarter, and those results will figure into the price of any deal that eventually gets done. (There will be no deal in the next two weeks, and any serious bidder would know how Brocade is doing financially before signing an agreement.)

    I think the bigger problem for Brocade, now that it is flogging itself, is to ensure that it attracts strong interest from at least two strategic buyers — companies that want to buy Brocade because the difference between owning it and not owning it will have material impact on long-term competitive positioning.

    Can it get a bidding war started? I’m not sure. I suspect it already has one interested party, but the price on offer — which already takes into account whatever is happening in this quarter, among other factors — isn’t attractive to Brocade’s board of directors.

    Hence the leak in the WSJ. The mention of Qatalyst is the tipoff. This isn’t just about burnishing a turd of a quarter.

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