Friday, July 23, 2010

EMC and Brocade

Update on 9/2/10: this was posted on July 23, 2010, when BRCD was around 5.03. BRCD declined even further over the next few weeks, dropping to around 4.70. On September 2, 2010, BRCD went as high as 5.64. I get concerned when a stock pops over 20% in less than a month, and with my "two in the hand is better than one in the bush" mentality, I reduced my positions substantially. BRCD is no longer my largest holding, and I no longer have an opinion about the direction of its stock price. However, I continue to think a "horizontal acquisition" (when a competitor buys out its competition) would be ideal for EMC and BRCD. Original post is below.

Update on 9/7/10: today, I sold all but one of my BRCD shares. Will I regret my decision? Perhaps. But as I said earlier, I am risk-averse, especially after seeing a stock move higher so quickly.

More here, in case anyone is interested. Check out the comments section within the link.


I've got a superstitious side. I sometimes get gut feelings based on no evidence or new information, and yet, my logical side fails to ignore these feelings. I know this: I am no prognosticator. You should not rely on my subjective opinions. For some strange reason, I just got a gut feeling that EMC may be buying out Brocade (BRCD). I used to think IBM would buy out Brocade, but now EMC seems a more viable suitor. No logic is involved, just a sudden gut feeling. As of today, Brocade is trading around 5.03/share.

Mind you, I have no idea if or when Brocade will be bought out, but it seems clear that BRCD is too small to compete against IBM, HP, or Cisco. Yet, despite all odds, Brocade continues to offer excellent technology and human capital. As such, once Brocade's earnings get back on track, it will be an attractive takeover target. It seems to me that a smart suitor will buy a beaten-down company right before it starts doing well, not after. Once Brocade performs well, its stock price will increase significantly, making a buyout more expensive. Right now, though, if EMC were to offer Brocade $7.00/sh, I would be very pleased.

Disclosures: I own Brocade (BRCD) shares. As of July 23, 2010, Brocade is my largest individual stock holding. However, my holdings may change in the future.

Update: conventional wisdom indicates a buy-out won't happen any time soon. Oracle's Ellison has indicated he isn't interested in Brocade, and HPQ/Dell seem to be moving towards more software-based companies. Also, EMC has publicly stated it is looking at sub-billion dollar purchases, so perhaps BRCD is too expensive for EMC. Even so, I continue to believe that Brocade will be bought out at some point.

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