Brocade Communications Systems, Inc. (BRCD)’s Looking for M&A Love Ahead of Earnings

Page 1 of 2

A balance sheet is the heart of every corporation. Any time I come across a business with lots of cash but below-average growth, I begin to play matchmaker. I’ll take that company and put in “column A” and try to pair it up with companies in “column B” that I think can produce growth. But this doesn’t always work. Hewlett-Packard Company (NYSE:HPQ)‘s botched hookup with Autonomy serves as a perfect example.

Nonetheless, column B remains filled with candidates. And on that list is Brocade Communications Systems, Inc. (NASDAQ:BRCD) , one of the best stories that no one has ever heard of. Granted, the stock has not gone anywhere is almost a year. However, where Brocade lacks in flair, the company has more than made up for it in execution. And with its Q1 earnings report due on Valentine’s Day, this company deserves love from investors and potential suitors.

Brocade Communications Systems, Inc. (NASDAQ:BRCD)

What is Brocade, really?
I will concede that this has not been an easy company to figure out. While Brocade has produced revenue growth and solid free cash flow for eight consecutive quarters, the top line has not overwhelmed the Street, as evident by 5% revenue growth in Q4. Consequently, Brocade doesn’t get much press, not to the extent that it can excite investors. Plus it’s tough to be bullish when Brocade competes with some serious heavyweights in its core business.

Fairly or unfairly, this is a company that has to be great just to be considered good. And “great” has been a challenge. Although Brocade has made meaningful improvements recently, that enterprise revenue continues to trend lower year over year means Brocade has been unable to seize market share against the likes of Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR) in enterprise data centers.

Besides, in software-defined networking, or SDN, it will require major leaps forward for Brocade to become a true threat to rivals like Oracle Corporation (NASDAQ:ORCL) and VMware, Inc. (NYSE:VMW) which recently spent $1.26 billion to acquire Nicira, a start-up with strong technology in the SDN market. However, it’s encouraging that VMware and Brocade have recently formed a partnership. But it will be a while before Brocade’s Ethernet fabric strategy is embraced as a solid foundation in SDN deployments.

Out with uncertainty, in with speculation
In the meantime, however, Brocade has removed a great deal of uncertainty now that the company has installed Lloyd Carney as new CEO, replacing Mike Klayko, who said in August that he would be leaving. Then again, this move has brought about a rash of speculation. As noted above, Brocade has been a mainstay in my column B acquisition bin as solid takeover candidate.

Maybe it’s fate. But it’s certainly interesting to note that the last two companies that Carney has led, he’s sold. The first was Micromuse, which International Business Machines Corp. (NYSE:IBM) acquired in 2005. And then he took over Xsigo Systems, which was bought by Oracle last year. All of these activities suggest that Carney has plenty of M&A experience. Add in Brocade’s desire to be sold, and he’s the perfect hire — or in this case, matchmaker.

What’s more, that Carney once served as chief operating officer at Juniper, he has plenty of experience, and probably a host of potential suitors already in mind. The question, however, is which company makes the best fit? Plus, what exactly can Brocade offer, say, to a company like Cisco Systems, Inc. (NASDAQ:CSCO), which has ample cash and has been spending in Brocade’s direction?

Plenty to offer with little baggage
In the most recent quarter, Brocade made a good case for itself. Amid a poor macro environment, revenue grew 4% sequentially and 5% year over year to $578.3 million, easily beating the consensus estimate of $566 million. The company was helped by better-than-expected performance in product revenue, which advanced 7% year over year and 5% sequentially.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!