NEW YORK (Reuters) - Brocade Communications Systems Inc’s BRCD.O top executive denied on Monday that the network equipment maker was looking for a buyer, disappointing investors who had pinned their hopes on a buyout.
The company’s shares fell 6.5 percent, as its plans to grow through partnerships failed to bolster Wall Street’s confidence in Brocade’s competitive position amid a series of mergers and acquisitions among its peers.
“The risk arbitrage community was trying to play a potential deal and, with the company saying they’re not for sale, they’re finally giving up, tossing in the towel,” said Broadpoint AmTech analyst Brian Marshall.
Brocade was widely seen as having missed out on a buyout opportunity when Hewlett-Packard Co (HPQ.N) said it would buy 3Com Corp COMS.O rather than Brocade.
People familiar with the matter told Reuters in October that Brocade, which sells network gear and software that help companies manage data networks, had put itself on the block and that HP was a possible buyer.
Chief Executive Michael Klayko denied this.
“We’re not actively shopping ourselves. That’s false,” he told Reuters in a telephone interview.
The HP-3Com deal, as well as other mergers and acquisitions in the industry, have raised concerns about whether Brocade can compete against rivals, including market leader Cisco Systems Inc (CSCO.O).
“Obviously, if HP had decided to acquire Brocade, it would’ve worked out better for Brocade shareholders,” said Matt Bryson, an analyst at Avian Securities.
He also noted that investors had hoped that, in the absence of an acquisition, HP would agree to an OEM (original equipment manufacturer) deal to resell Brocade’s networking products. The 3Com deal also made such a deal unlikely.
Brocade shares fell to $7.29 in midday trading from their close at $7.798, despite stronger-than-expected results announced after the market closed on Monday. [ID:nN23258074] The stock is down about 15 percent since HP announced its plan to buy 3Com.
STRING OF M&A
The HP-3Com deal followed a string of acquisitions in the technology industry, including Dell Inc’s DELL.O purchase of Perot Systems Corp, Xerox Corp’s (XRX.N) pending acquisition of Affiliated Computer Services Inc (ACS.N) and Oracle Corp’s ORCL.O plan to buy Sun Microsystems Inc JAVA.O.
Large technology companies want to expand product portfolios and become “one stop shops” for customers’ technology needs. Smaller manufacturers are believed to be open to buyouts as a way of securing solid sales channels.
But Brocade said it was seeking to grow through partnerships and said its sales agreements with Dell and IBM were on track to bring in more revenue in 2010.
“We’re comfortable with the progress, specifically with IBM and Dell,” said Ian Whiting, Brocade’s senior vice president of worldwide sales.
Brocade reported on Monday a fiscal fourth-quarter profit excluding items of 15 cents per share, exceeding the average analyst forecast of 13 cents a share, according to Thomson Reuters I/B/E/S. It also repeated its forecast that business would pick up in 2010.
Analysts said those results showed Brocade’s near-term performance was solid, regardless of the disappointment from the HP-3Com deal.
Some also said that, despite the CEO’s comments on Tuesday, Brocade was still an attractive buyout target for technology companies looking to expand. Dell, IBM, Juniper Networks Inc (JNPR.N) and Oracle have all been named as possible buyers.
“I think Oracle would be interested. Dell, Juniper, all those guys. So I definitely think it’s a strategic asset and people are probably kicking the tires there,” said Broadpoint AmTech’s Marshall, who added he was upbeat on Brocade even as a stand-alone company. “At the end of the day, let’s look at it on a pure fundamental basis. This name’s cheap.”
Marshall noted the shares were trading at around 10 times his forecast for the company’s 2010 earnings, compared with around 14 times for the broader S&P index. His 12-month price target for the stock is $11.
Reporting by Ritsuko Ando; editing by Gerald E. McCormick, Derek Caney and Andre Grenon