Thursday, September 2, 2010

Update on Brocade

On July 23, 2010, I wrote: "I own Brocade (BRCD) shares. As of July 23, 2010, Brocade is my largest individual stock holding." The original post is HERE.

On July 23, 2010, BRCD was trading around 5.03. BRCD declined further over the next few weeks, dropping to around 4.70. I continued to buy on the way down, even as I doubled my workout routine to deal with the stress.

On September 2, 2010, BRCD went up to 5.64. I sold most of my shares around 5.57.

Although it seems counter-intuitive, I get very anxious when a stock pops over 20% in less than a month. With my "two in the hand is better than one in the bush" mentality, I sold almost all of my BRCD stock. 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 or supplier) would be ideal for EMC and BRCD, especially because the risk of a DOJ anti-trust objection appears negligible. (Strangely enough, rumors are floating now about EMC being a takeover target, even though very few companies could afford to buy EMC.)

It's puzzling to me that almost no one has suggested EMC as a potential acquirer of BRCD. Dell (DELL), Hewlett-Packard (HPQ), IBM, and Oracle (ORCL) are usually mentioned in every story about Brocade--even though Larry Ellison once said he wasn't interested in Brocade, and HPQ might not be too keen on making another acquisition so soon after its 3PAR (PAR) deal.

Regardless of the potential synergies, a Brocade buy-out isn't a sure thing. For example, a company interested in Brocade may decide to look at QLogic Corp. (QLGC) instead. Also, Brocade's Board of Directors may demand a buyout price beyond what an interested acquirer would consider fair or reasonable. And of course, Brocade may simply decide to move forward on its own.

I do know one thing, though--with so much cash on their books, tech companies are sick of getting close to 0% for it. Most tech companies--mindful of the boom/bust cycles common in the technology arena--usually hoard cash and pay either no dividend or a paltry one. As long as interest rates remain low, many tech companies will be looking to grow through acquisitions. Good luck to them, and good luck to Brocade and its CEO Michael Klayko.

Prior to Brocade, Mr. Klayko held positions at EMC and IBM.

Disclosures: I continue to own some Brocade (BRCD) shares, but my holdings may change in the future.

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