Thread regarding Brocade Communications Systems Inc. layoffs

Brocade Communications Systems Inc

Brocade Communications Systems Inc. is reportedly pursuing a potential sale that could mean big changes for San Jose’s fourth biggest tech employer.

The company has looked for buyout opportunities before, including in 2009 when it held talks with Hewlett-Packard Co. It appears that discussions with various suitors have been renewed, with Reuters reporting on Jan. 9 that the company is talking to several private equity buyers and recently hired Frank Quattrone’s Qatalyst Partners to help them pursue a buyout deal.

Now, a question mark hangs over what a deal could mean for a company that has more than 2,000 local employees, moved into a brand-new 562,000-square-foot North San Jose headquarters in September 2010.

Analysts said the company is being spurred into a sale by an under-performing stock performance and pressure from shareholder Elliott Associates, which has an approximately 10 percent stake in the company.

Brocade’s stock has improved over the last couple of months, closing at $5.77 on Jan. 11 from a low of below $3.50 in August. But overall, growth has been stagnant: $5.77 was the exact same price it opened at on Jan. 11, 2011. Bloomberg reported that the company would be an extremely cheap buy: It was trading at 7.7 times its cash from operations, while the median among comparable companies was 17 times.

Brocade is the biggest player in its core business, making “fibre channel” networking equipment. However, they also branched into another area of networking hardware, ethernet switches, by acquiring Foundry Networks Inc. in 2008.

Best company solution

The fibre channel business is large and highly-profitable, but there’s not much room to grow and there are doubts about the technology’s longevity, said Bill Choi, a New York-based analyst with Janney Montgomery Scott. Brocade’s ethernet business has more opportunity, but the company only has a tiny share of the market.

“What you’re looking at is can you break this out in pieces,” Choi said. “Someone’s going to want the high growth opportunity in ethernet and somebody else is going to want the slower growth” in fibre channel equipment.

Silver Lake Partners, TPG Capital, Blackstone Group LP, Bain Capital and Warburg Pincus LLC were named by Reuters as potential private equity buyers. Brocade declined to comment on a potential sale.

“I think (Brocade) lost the confidence of the investment community so it’s difficult to attract talent when stock is underperfoming,” said San Francisco-based analyst Erik Suppiger with JMP Group. “At least amongst the investors there’s a lot of concern that (their ethernet) strategy is not working and is not going to work. Certain private equity might be inclined to restructure and just take the company in a different direction. Still, a takeover by another major tech company instead of a private equity firm is a possibility, though a less likely one, analysts said.

Hewlett-Packard, Dell Inc. and IBM Corp. have all been named as potential buyers, but they’ve already made acquisitions in the networking business that would make Brocade somewhat redundant, such as HP’s 2010 acquisition of 3Com Corp., Suppiger said. He named Oracle Corp. and Huawei Technologies Co. Ltd. as others who could have a potential strategic interest.

A strategic deal with a tech company may be problematic because about two-thirds of Brocade’s revenue comes from sales through other companies such as HP and IBM, said San Francisco-based analyst Matthew Robison, of Wunderlich Securities. If Brocade were acquired by one of those companies, the price would likely have to be discounted and other companies might have to drop their agreements with Brocade due to competitive considerations.

“You can see where if you were IBM and you buy Brocade, you say automatically I don’t get that revenue (from IBM) anymore because I’d be selling to myself, or you might say, ‘Hey HP is going to quit buying (Brocade’s) stuff because I own it now,’” Robison said.

If Brocade is bought by a private equity firm, any employee layoffs and other changes likely would not happen until the firm decided whether to break the company up and how to do it, Suppiger said.

Stay in San Jose

Regardless, the fate of the company is of major importance to San Jose. Mayor Chuck Reed said keeping the company in the city is one of San Jose’s “success stories.”

When Reed learned from Brocade CEO Mike Klayko that the company was expanding and considering leaving the area, Reed said, “I asked him to give us a chance to see what we could do to help him stay in San Jose. He gave us a chance.”

The city offered Brocade an incentive of $4 million in redevelopment agency funds to locate its headquarters at the @ First development in San Jose.

The company is an active corporate citizen, and Klayko is chairman of the Silicon Valley Leadership Group. Carl Guardino, the group’s CEO, calls Brocade a “classic” Silicon Valley success story. “They bet on San Jose when not everyone was doing that, especially during the downturn,” Guardino said.

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