Brocade Communications Systems, Inc. (NASDAQ:BRCD) In Deal Play?


A Bloomberg report published shortly after noon yesterday said Brocade Communications Systems, Inc. (NASDAQ:BRCD), a networking hardware company, was in advanced talks to sell itself.

Brocade shares immediately shot higher, and finally closed Monday at $10.60, up 21.98%, with 35.19 shares changing hands. Considering that volume was nearly 7X the average volume of 5.15 million in Brocade, it appears a lot of speculative fervor has fanned the leap in price.

Technically, because Brocade has shot through the three moving averages (20-, 50- and 200-day) in one fell swoop, and also closed above the two previous highs in April and September respectively, it is now in bullish territory.

Brocade Communications Systems, Inc. (NASDAQ:BRCD) up for sale, says Bloomberg

Bloomberg said in its article that Brocade was in “the final stages of a sale process,” that chipmaker Broadcom is interested in the company, and that the transaction might well be announced within the week.

Broadcom is a serial acquirer and much of its $66.52 billion market capitalization has been built up through M&A, including its own merger with Avago Technologies. Brocade’s networking business is said to make a good fit for Broadcom because the latter’s chips find widespread application in switches, an essential component in huge data centers that currently drive cloud computing.

On the other hand, Brocade has never been able to get out from the shadow of Cisco Systems, the 800-pound gorilla in the networking room. Revenue at Brocade has remained flat over the four years from 2012 through 2015, and the company may therefore welcome Broadcom as a suitor, Bloomberg said.

Brocade Communications Systems, Inc. (NASDAQ:BRCD) – Broadcom deal “logical”

According to RBC Capital Markets analyst Amit Daryanani, quoted in IBD, “the acquisition would be fairly logical and would fit Broadcom’s historical M&A practice.”

Wunderlich Securities analyst Matthew Robison said Monday on CNBC’s Power Lunch that Brocade had strong free cash flow that was “”imminently financeable,” as well as some high growth, industry-leading wireless LAN technology.


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