Brocade Buyout Chatter Heats Up

Inquiring minds want to know - just how long will Brocade Communications (NAS: BRCD) have to sit in the front yard bearing a "for sale" sign without attracting a buyer? Possibly not much longer.

Last night details emerged that the world's largest private-equity firm, Blackstone Group (NYS: BX) , could be considering a takeout offer for Brocade. While these are unconfirmed rumors as of right now, they are likely to put some zip into Brocade's valuation.

This same report from Bloomberg also went on to mention that smaller private-equity firm Thoma Bravo attempted to purchase Brocade, but simply couldn't get the leverage to support such a large buyout. With unsubstantiated claims still flying, a person familiar with the situation also noted that Dell (NYS: DELL) passed over Brocade last year in favor of purchasing Force10 Networks.

Are you confused yet? Well relax, because that's a lot of information and might-be's to ingest all at once.

The real takeaway here remains the same -- that Foundry Networks products, which Brocade acquired in 2008, are the real allure of any takeover bidder. Brocade's networking switches became obsolete with the introduction of Fibre Channel over Ethernet switches by Cisco Systems (NAS: CSCO) . There is residual revenue and profitability in these switches, but its customers are beginning to make the changeover. This was, I feel, the real reason Brocade put itself up for sale in the first place.

It has strong supply partnerships, as I've noted recently with IBM (NYS: IBM) , Hewlett-Packard, and Dell. But we learned today that Dell appears to be out of the running and Hewlett-Packard exited the hardware business altogether last year. This leaves just IBM as a potential suitor for Brocade aside from private-equity firms.

Brocade's valuation will also play a defining role in whether or not it gets purchased. A few months ago, when the stock was trading w ell below $4, many, including myself, felt the rewards far outweighed the risks. With a closing valuation yesterday of $2.65 billion and the stock headed up another 4% in after-hours, the prospects of a premium on any buyout offer are quickly flying out of the window.

I stand by my recommendation in January that Brocade remains a buy, but investors should really temper their expectations. Even if Brocade doesn't get a deal done in 2012, it still offers value with a forward P/E of just 10 and a price-to-cash-flow of 6.5. Both of these metrics are considerably lower than its five-year averages.

Keep up on the latest Brocade buyout chatter by adding it to your free and personalized Watchlist and feel free to post your thoughts on who might purchase Brocade, if anyone, in the comments section below.

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At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. He enjoys trying to predict who buys whom next. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of IBM and Cisco Systems, and has created a bull call spread position in Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems and Dell. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat'll never be obsolete.

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