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Report: Brocade puts itself up for sale

Brocade Communications Systems Inc. has hung a "for sale" sign on its door, according to a report today in The Wall Street Journal. Brocade declined to comment on the report.

Hewlett-Packard Co. and Oracle Corp. have shown interest in buying the maker of switches for routing data storage traffic, according to the report, which added that an agreement is not imminent.

Brocade is said to be valued at about $3.2 billion. The company reported a loss of $21 million on sales of about $493.3 million in its fiscal 2009 third quarter, which ended Aug. 1.

San Jose-based Brocade has about 2,800 employees.

Late last year, Brocade purchased Foundry Networks Inc., acquiring IP networking technology that gives it a leg up in the server networking market and puts it in a stronger competitive position vis-à-vis Cisco Systems Inc.

"The question is, ‘Do the server vendors want to increase the competitive pressure against Cisco, because Cisco is now in the server business?’" said Brian Babineau, an analyst at Enterprise Strategy Group in Milford, Mass. "I think that’s what makes Brocade more attractive, and you can consider Oracle in the server business as well because they plan to own Sun."

Babineau said he had heard rumors as recently as last week about Brocade putting itself on the block. If those rumors are true, he added, the timing isn’t surprising.

Over the past seven or so years, switch maker Cisco has added a line of storage switches and routers that make it a heavy player in the storage business. Just last month, it was reported that Cisco and EMC Corp. were in talks to create a technology services arm. Earlier this year, Cisco, EMC and others said they had jointly developed a new storage blade server to be sold by Cisco.

Brocade has also been making moves to expand its sales channels by signing reseller agreements with EMC rivals IBM and Hewlett-Packard Co., as well as quasi-competitor Dell Inc.

Dell has increased its presence in business-class data storage systems over the past few years, originally through reseller deals with EMC and recently with its own line of data storage products, which are moving from entry-level to midrange. Dell’s acquisition of storage vendor EqualLogic two years ago likely placed a strain on its reseller relationship with EMC.

Babineau said Hewlett-Packard may be the most appropriate suitor for Brocade because it has an established portfolio of networking and storage products, and because Cisco is increasingly competitive with HP.

"It’s very logical. If you look at the timing, it’s almost like a perfect storm for Brocade," Babineau said. "Exiting a Foundry integration process, potential uptick in IT spending starting shortly, and big IT companies wanting to compete against Cisco with Brocade being one of the only viable candidates in that market."

"This is not about storage, but about networking," he added.

Another source, who asked not to be named, said that HP executive Dave Donatelli, who had headed EMC’s storage unit before moving to HP earlier this year, could help HP position Brocade’s storage offerings against those of his former employer. "I just think Donatelli has some real institutional knowledge after selling a good portion of Brocade’s products when he was with EMC," the source said.

Analysts say Hewlett-Packard may be most logical suitor for the storage switch maker

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