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TheStreet Open House

5 Technology Deals That May Need to Die (Update 1)

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2. Brocade Communications

Since putting the company up for sale in 2009, Brocade has long been rumored as a takeover target for a private equity firm or strategic acquirer like NetApp, Dell, HP or Oracle, among a host of tech players. Quatalyst Partners tech banker Frank Quattrone has reportedly been shopping the maker of switches for data-storage networks for years, but it increasingly looks like Brocade will have to go at it independently in the nearterm.

In recent weeks shareholding data and reports from Bloomberg and DealReporter signal that prospective buyers are vacating Brocade as an acquisition target. Because prospective private equity buyers like the Blackstone were reported to walk away from the bid because the market cap had swelled above $2.5 billion.

After news of a deal breakup came in late February, FBN Securities analyst Shebly Seyrafi nevertheless raised his price target for Brocade shares to $6.50 from $5.50 on the company's first quarter earings and second quarter outlook, noting ethernet sales and the benefits of an over 50% debt reduction. "A smaller M&A premium is therefore indicated for Brocade ," wrote Seyrafi of his raised price target.

Meanwhile, Elliott Management sold over 9 million Brocade shares between Nov. 3 and Jan. 12, according to filings with the Securities and Exchange Commission, essentially removing that firm as a potential acquirer.

Prior to private equity takeover reports, long-rumored strategic acquirers of Brocade like Dell and IBM fell by the wayside as they cut other deals in the networking space in 2011. Nevertheless, in the most recent quarterly filings, some hedge funds piled into Brocade's stock in the fourth quarter, a sign there may still be a whiff of speculation left.

Highbridge Capital Management bought over 2.3 million Brocade shares, while Millennium Management and Two Sigma Investments build 1 million share-plus sized stakes in the quarter. Meanwhile, Caxton Associates, Delaware Management and Pyramis Global added roughly 1 million shares to their holdings. For Highbridge, Brocade is now the funds third largest holding, according to its latest filing.

Brocade's shares have risen nearly 10% in 2012, adding to a fourth-quarter gain of more than 25% as earnings recovered and sale speculation intensified. Nevertheless, Brocade's shares are still off 12% in the last 12 months.

In 2011, Brocade saw its profits fall by over 50% to just over $50 million, while revenue grew over 5% to $2.1 billion. In its most recent quarter ended in January, Brocade posted a $58.6 million profit though.

Brocade is expected to record $2.2 billion in sales and $87.9 million in profit in 2012, according to consensus estimates of analysts polled by Bloomberg, who give the company's shares a price target of $6.61. Currently, 6 analyst rate Brocade's stock a "buy," while 22 rate it a "hold" and 3 give it a "sell."

Other large Brocade shareholders include Franklin Resources, Fidelityand Vanguard, each with over 5% stakes in the company's shares.

For more on Brocade, see stocks under $10 setting up to trade higher .

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