Bloomberg News

Blackstone Said to End Talks to Buy Brocade Because of Price

February 28, 2012

(Updates with analyst’s comment in fourth paragraph.)

Feb. 17 (Bloomberg) -- Blackstone Group LP, the world’s largest private-equity firm, ended talks to buy Brocade Communications Systems Inc. because the price was too high for a leveraged buyout, said a person with knowledge of the situation.

Blackstone and Francisco Partners had been discussing a potential takeover of Brocade after other private-equity firms lost interest, said the person, who declined to be identified because the matter is private. The maker of switches for data- storage networks, which has been looking for a buyer since 2009, has a market value of about $2.58 billion.

Brocade has become more expensive after rebounding more than 60 percent since an Aug. 5 drop, when the San Jose, California-based company reported preliminary results that fell short of its forecasts. Brocade’s fourth-quarter earnings excluding items beat analysts’ estimates in November, helped by record revenue in its Ethernet business. The company has more than doubled its free cash flow in the past five years.

“Brocade generates a very healthy cash flow and doesn’t have the financial urgency to sell,” said Erik Suppiger, an analyst at JMP Securities LLC in San Francisco, who has a neutral rating on the stock. “The question is how long its growth will last, as Brocade’s legacy fiber-channel technology gets replaced by the new Ethernet technology. The transition could take a decade -- the longer, the better for Brocade.”

Ethernet Assets

After falling as much as 10 percent, Brocade shares closed down 2.2 percent to $5.68 as of 4 p.m. New York time. The stock advanced 12 percent this year through yesterday.

Spokesmen for New York-based Blackstone and Brocade declined to comment. A representative of Francisco Partners wasn’t immediately available to comment.

Brocade bought Foundry Networks Inc. in December 2008 to enter the market for so-called Ethernet switches, which are gaining popularity in data centers. In July, Dell Inc. passed over Brocade to buy competitor Force10 Networks Inc., a person with knowledge of the situation said at the time.

Elliott Management Corp., the hedge fund that pushed Novell Inc. to sell itself in 2010, reduced its stake in Brocade last month to 7.5 percent from 8.5 percent. At the time, Brocade had gained about 64 percent on renewed speculation about a potential sale since Elliott amassed the stake in August.

Fund managers sometimes use their status as shareholders to urge management to shift strategy or look for a buyout. Activist investor Carl Icahn pressed Motorola Mobility Holdings Inc. on July 21 to explore strategic alternatives. Google Inc. agreed to acquire Motorola Mobility for $12.5 billion on Aug. 15.

--With assistance from Devin Banerjee and Cristina Alesci in New York. Editors: Elizabeth Wollman, John Lear

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net


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