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Tickers in this Article: BRCD, CSCO, IBM, JNPR, HPQ, NTAP
A better-than-expected earnings result and upbeat guidance for the coming year helped shares of network equipment maker Brocade Communications (Nasdaq:BRCD) soar more than 14% recently. But speculation that the company could be on the short list of acquisition targets in the increasingly contentious server war between network giants Hewlett-Packard (NYSE:HPQ) and Cisco (Nasdaq:CSCO) may also be playing a part in the stock's recent gains.

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Brocade Ups Its Game With IBM
Since hitting its March low of just over $2, the shares have increased three-fold, trading recently at over $7 a share. Both revenues and earnings excluding special items for the fiscal second quarter ending May 2 beat analyst expectations, leading the company to reiterate its confidence in achieving full-year earnings per share of 40 to 50 cents, as per its earlier forecast.

The strong results and bullish outlook suggest that the company's recent moves to strengthen its ties with powerful ally IBM Corp. (NYSE:IBM) are paying off. Recently, the companies cut a new distribution deal whereby IBM 's sales force will sell Brocade products tagged with the IBM logo. While IBM has been selling Brocade's products over the past decade, the move allows much smaller Brocade to gain considerable leverage from IBM's brand and help it sell the routers and switches it packed up as a result of last year's $3 billion acquisition of Foundry Networks, a small rival to Cisco.

Server War Heating Up
The move comes against the backdrop of a recent ratcheting up of the battle for control of the server market. First and second ranked players IBM and HPQ are now facing new competition as a result of Cisco's recent decision to start selling servers.

With demand for personal computers, the sales of which account for about one-third of the company's revenues, experiencing one of its worst slump in history, Hewlett-Packard is strongly motivated to increase its hold in the fast growth server market. And the best way for the company to gain the upper hand, according to analysts, would be to close a quick acquisition. It's a strategy that many of the larger tech giants like Hewlett have been turning to as growth rates in their core businesses have stalled. Likely candidates would include NetApp (Nasdaq:NTAP), Juniper (Nasdaq:JNPR), and Brocade.

The Bottom Line
The possibility that Brocade may be acquired by IBM makes it an appealing stock, but even if that merger doesn't happen, Brocade's future is looking bright. While there's no certainty that a deal will ever take place, potential suitors will no doubt be attracted to Brocade's improving fundamentals. (Take a look at our related article on Analyzing An Acquisition Announcement)

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