Cisco/Brocade Rumors Pop Up

Rumors on Wall Street this week have Cisco Systems Inc. (Nasdaq: CSCO) eyeing an acquisition of Brocade Communications Systems Inc. (Nasdaq: BRCD), driven by a need to prop up growth and a desire to block Brocade's $3 billion acquisition of Foundry Networks Inc. (Nasdaq: FDRY).

Some sources contacted by Light Reading seemed tepid on the theory. "I've heard buy-side rumors, people who are probably long Brocade," says one analyst, requesting anonymity.

The move would make some tactical sense. It would boost Cisco's standing in storage networking and would also keep Foundry out of Brocade's hands. Brocade is hoping its $3 billion purchase of Foundry will make it an Ethernet/storage powerhouse to rival Cisco, or at least Juniper Networks Inc. (NYSE: JNPR). (See Brocade Takes Aim at Cisco (& Juniper).)

Moreover, Brocade would come at a discounted price. Shares are still down about 12 percent since the company announced the 40 percent premium it would pay for Foundry, and its stock is down 25 percent from a 52-week high of $9.61 set on Halloween.

Then again, maybe it's just a sign that Cisco acquisition rumors are back in season. Talk of a deal with EMC Corp. (NYSE: EMC) was making the rounds just weeks ago.

That talk might be fueled by a relative slump in orders that, come October, will have dogged Cisco for a full year. The company is still growing, but in single digits, compared with the 12 to 17 percent range that CEO John Chambers continues to target. (See Cisco: Economic Troubles Aren't Over.)

"There's no question Cisco needs to do something," says one financial analyst.

Cisco wants to use acquisitions, or at least partnerships, to expand its territory. But EMC, with a market valuation exceeding $30 billion, wouldn't be a buyout option, Chambers hinted on a recent earnings call with analysts.

"Think of us acquiring more in the Scientific Atlanta type of range," he said.

A Scientific Atlanta-sized deal would be around $7 billion. (See Cisco to Acquire Scientific-Atlanta.) Brocade's market capitalization, at around $2.7 billion, would be an easy snack by comparison, along the lines of the $3.2 billion WebEx Communications buy. (See Will WebEx Change Cisco?)

Still, some arguments would point against the deal. "They would have a huge portion of the Fibre Channel switch market. I don't know how the government would look at that," says one analyst requesting anonymity. [Ed. note: Probably with the same blind enthusiasm they view oil company mergers and anything Clear Channel does.]

Analyst Tom Nolle of CIMI Corp. hadn't heard the Cisco/Brocade rumor until Light Reading called. But he offered that he wouldn't expect Cisco to take that big a step. "If I were Cisco, I would be looking to buy a smaller Fibre Channel player rather than somebody like Brocade, because they don't really need to buy the size," Nolle says.

But, Cisco could use help in storage. The company is heartily pushing Fibre Channel over Ethernet with the Nexus line of switches launched early this year. (See Cisco's Nexus Targets Data Center's Future.) But its Fibre Channel business, through the MDS line of switches, sagged in the fiscal fourth quarter, which ended in July -- down 14 percent from the previous year and 40 percent from the third quarter.

Part of the problem could be that Cisco lacks products for 8-Gbit/s Fibre Channel, an area that's been looking fruitful for competitors like, well, Brocade. (See Brocade Busts Out Big Numbers and Brocade Busts Out HBAs & FCOE Roadmap.)

— Craig Matsumoto, West Coast Editor, Light Reading