Brocade a Stitch Closer to Cisco

Updated from 12:20 p.m. EST

Despite the recent slump in tech stocks, shares of storage equipment manufacturer Brocade(BRCD Quote) are creeping up after the firm clinched its $2.6 billion acquisition of switch specialist Foundry Networks(FDRY Quote) last month.

Like most tech firms, Brocade's shares took a severe pounding during the fall but have rallied recently as investors warmed to the Foundry deal. Brocade's stock rose Tuesday to close up 21 cents, or 6.33%, to $3.53, as the Nasdaq inched up 1.5%, although this is still well below the firm's 52-week high of $9.09.

Foundry's Ethernet technology is seen as boosting Brocade's ability to compete with networking giants Cisco(CSCO Quote) and Juniper Networks(JNPR Quote) , particularly in high-speed 10-Gbit/s Ethernet. With users looking to shift large volumes of data around their networks as quickly as possible, 10-Gbit/s Ethernet extends Brocade's reach beyond storage into data center networking.

"We believe the Foundry acquisition gives Brocade the much needed Ethernet technology," wrote Jefferies & Company analyst Munjal Shah, in a recent note, describing the deal as "the right strategic step."

With cash-strapped firms slowing their tech spending, many tech companies are now looking to diversify and target new revenue streams, from consumer storage to corporate networks. Even networking colossus Cisco, for example, is rumored to be building a blade server that would compete with Hewlett-Packard(HPQ Quote) and IBM(IBM Quote).

Brocade, which spent $713 million to acquire switch specialist McData in 2006, still faces plenty of challenges integrating Foundry, according to Jefferies & Company's Shah.

"We think Brocade is taking on a big project in uncertain economic times," he wrote, in his recent note. "While Brocade has a solid track record of integrating companies, we remain concerned in the near-term due to potential management changes at Foundry, sales channel conflicts and product integration challenges."

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