Brocade fields bids for sale: sources

NEW YORK Mon Jan 9, 2012 9:40pm GMT

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NEW YORK (Reuters) - Brocade Communications System Inc (BRCD.O) has received first-round bids from a handful of potential buyers as the company explores a sale, sources familiar with the matter said.

Shares of the San-Jose, California-based maker of switches and routers for managing data traffic jumped as much as 10.4 percent on Monday after Reuters reported the company was exploring a sale. They gave back some of those gains, however, ending Monday's trading session up 35 cents, or 6.5 percent, at $5.77 per share.

Brocade, which has a market value of nearly $2.7 billion, hired Frank Quattrone's Qatalyst Partners in November to focus on a deal that could result in a leveraged buyout, the sources said.

Sources said Brocade has held talks with at least a half dozen potential private equity buyers. Among them are Silver Lake Partners SILAK.UL TPG Capital LP TPG.UL, KKR & Co LP (KKR.N), Blackstone Group LP (BX.N), Bain Capital and Warburg Pincus LLC. WP.UL. So far, some private equity firms have only engaged in meetings but not submitted bids, while others have submitted bids, two sources said.

A Brocade spokesperson declined to comment. Qatalyst Partners did not return calls for comment. All of the private equity firms mentioned declined comment.

The current sale process marks at least the third attempt by Brocade to sell itself. In 2009, the company held talks with Hewlett-Packard Co (HPQ.N), but those discussions fell apart over price expectations, the sources said. Hewlett-Packard instead acquired networking company 3Com Corp for $3.1 billion.

Since then, private equity firms have been meeting with Brocade management about a deal, two of the sources said.

New York hedge fund Elliott International Capital Advisors Inc, known for publicly agitating companies to seek a sale, owns 10.53 percent in Brocade.

In 2010, one private equity firm came close to negotiating a deal with Brocade, but those talks also fell apart over a price discrepancy, one of the sources said.

The sources cautioned that, like Brocade's previous sale attempts, no deal may materialize this time around.

Private equity firms that have met with Brocade and its advisers in recent weeks have raised a number of critical points, including whether they can find a buyer for the company's Foundry Networks asset, another source close to the matter said on Monday. Brocade bought Foundry in 2008 for $2.6 billion.

"You could sell that piece off pretty easily," another source close to the matter said. "The question is how much debt would you put on it and what would the cash flows look like."

Many potential buyers are also concerned about the longevity of Brocade's fiber channel switching business, the sources said. This prompted a separate source to question the investment value of a deal.

Analysts cited Dell Inc DELL.O and Oracle ORCL.O as strategic buyers that could show some interest in Brocade.

"It is a good business and I think that quite easily a large OEM, a systems integrator like IBM (IBM.N) or Dell can be looking to augment its presence in the space," Mizuho Securities USA analyst Joanna Makris told Reuters.

Makris has a target price for Brocade of $5 based on an EBITDA to sales multiple of 1.3 times.

Michael Dell, founder and CEO of namesake Dell Inc, said on Monday at a business event in the southern Indian city of Bangalore that his company would use its "strong cash flows" to make acquisitions to boost growth.

Dell could acquire small- and mid-sized companies that would give it access to new technologies, he said.

A deal with Brocade would also provide a complementary platform to Force10 Networks, two sources said. Dell bought Force10 last year.

However, ThinkEquity LLC analyst Rajesh Ghai said Oracle ORCL.O would benefit more from a Brocade purchase. He believes that Brocade fits perfectly with Oracle's plans of being an end-to-end data center player.

"The only big hole (Oracle has) is on the networking side and buying Brocade does give them that footprint," he said.

(Reporting by Nadia Damouni; additional reporting by Siddharth Cavale in Bangalore and Greg Roumeliotis in New York; Editing by Gerald E. McCormick, Peter Lauria, Andre Grenon and Carol Bishopric)

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