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It's Time for Brocade to Sell and Cisco to Buy

Instead, I think a company like Cisco should step forward and close a deal. Aside from the fact that Cisco has the financial means to make this happen, it would certainly produce some good returns considering Brocade has more than doubled its free-cash-flow position over the past five years.

A deal like this would not only help strengthen Cisco's enterprise and cloud position. It would also be a good defensive play to keep Brocade out of the hands of other possible buyers, such as EMC, Hewlett-Packard and even Dell.

Furthermore, Brocade continues to be underestimated when it comes to its technical approach to the cloud. The company has taken a slightly different approach toward organization and deployment. It understands that networks must be cloud-optimized at every critical point because companies will weigh application performance and, even more importantly, the end-user experience.

Though it lacks the history of both Cisco and Hewlett-Packard, Brocade does have a strong tradition in both data and storage networking. From that standpoint, the company could even be attractive to a buyer like Oracle (ORCL), though that is a long shot.

Bottom Line

As long as Brocade continues to trade at these levels, buyout rumors are certain circulate. To its credit, the company continues to perform in a tough economic environment and in the face of fierce competition. That said, it remains a challenge to consider the stock attractive - even at under $5, because its P/E is twice that of market leader Cisco and three times Hewlett-Packard.

As enterprise spending continues to recover, there is a chance that Brocade will begin to see its stock price appreciate a bit more. But it stands to reason that the bigger names within the sector will put increased pressure on smaller names like Brocade to capture parts of the market. That's unless, of course, they have not already decided that they want Brocade for themselves.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author held no positions in any of the stocks mentioned.

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