by Brenon Daly
For all of the would-be suitors of Brocade Communications, now is seemingly the time to move on the enterprise networking vendor. The value of the company has been trimmed by about one-quarter this week, meaning that a buyer paying a typical premium would be getting Brocade for the price that it fetched on its own last week. (We understand that valuations aren’t quite that simple – and it probably shortchanges Brocade – but it’s directionally accurate.) The recent problems at Brocade stem largely from the Foundry Networks business that it acquired a little more than a year ago.
With investors lopping off the gains that Brocade had run up over the past 10 months, the company has clearly been marked down. Yet, on the other side of any theoretical deal for Brocade, the demand has probably dipped since M&A speculation was swirling around Brocade last October. The reason? One company that had been mentioned as a possible buyer for Brocade is probably now out of the market.
Hewlett-Packard made a major networking move of its own shortly after most people put it at the top of the list of potential suitors for Brocade. Last November, HP handed over some $3.1bn for 3Com, which means that it doesn’t need Brocade (or more specifically, Foundry) quite as much. Of course, IBM is still a big OEM partner for Brocade, as is Dell. Both of those vendors could still be interested in a major networking acquisition, particularly at a discounted price. Brocade currently sports an enterprise value of $3.1bn.
Since the beginning of September, a new euphemism has found its way into Wall Street parlance: ‘recalibration.’ It is a close cousin to the original euphemism, ‘correction.’ In fact, the pair of linguistically neutral terms are often popping up in the same sentence, such as ‘Given the market’s correction, we have recalibrated the deal.’ We gather that’s a lot more sensitive than saying, ‘Look, stocks have gone to hell, so we slashed the deal.’
Whatever the language, we saw two cases of this on Wednesday. Not unexpectedly, Brocade ‘amended’ its offer to buy Foundry, originally inked in late July. (‘Did we say $3bn? We meant $2.6bn.’) And Broadcom took a pair of scissors to its agreement to buy AMD’s digital television unit, cutting 25% from the price.
At least the deals will get done (probably). The same can’t be said for a transaction a banker described for us yesterday over coffee. Working on the sell-side, the banker and his client hammered out an agreement with a strategic acquirer over the summer. Terms called for the buyer to pay about $30m, about $25m of that in cash, the rest in equity. As shares in the would-be buyer ‘corrected,’ the company ‘recalibrated’ the price down to about $20m. The final kicker: the company planned to pay in stock. The would-be target is ‘recalibrating’ its interest in the offer.
With the stock market in turmoil, more than a few deals have seen a gulf widen between the current price of a would-be target and its proposed takeout price. So the question becomes: How to smooth the spread? Well, two different approaches – with wildly different results – seem to support the idea of disclosure, with more being better. Wall Street, apparently, is a little skittish these days.
A month ago, JDA Software took the unusual step of issuing a press release to assure Wall Street that it can actually pay for its PE-style acquisition of i2. Originally, JDA was banking on Wachovia to help fund its purchase. But as that bank came undone, Wells Fargo stepped in to join Credit Suisse as the lenders to JDA. That deal, which was launched in mid-August, goes to i2 shareholders a week from Thursday. Meanwhile, i2 shares are currently changing hands at about $14, compared to JDA’s bid of $14.86.
Contrast that clarity with the cloudy situation surrounding Brocade Communications’ planned purchase of Foundry Networks. When Brocade unveiled its ‘Cisco-killer’ acquisition in July, it said it would pay $18.50 in cash plus a sliver of stock for each Foundry share. The networking equipment maker’s stock traded near the bid until a disastrous decision Friday to delay its shareholder vote on Brocade’s offer, citing ‘recent developments.’
While the company may have had its hands tied about what it could say about these ‘developments,’ the ominous move spooked the market. Concerns immediately arose about Brocade being able to pay for the $3bn acquisition, given the tight credit market, as well as the SAN vendor perhaps knocking down its offer price. Shares are now changing hands at $13.36 – almost exactly where they were before Brocade launched its bid three months ago. We’ll see if the initial offer holds up when Foundry shareholders vote on the deal Wednesday afternoon.
At the rate networking companies are consolidating, there may be no one left to buy Meru Networks. Earlier this week, Hewlett-Packard satisfied its appetite for WLAN equipment by acquiring Colubris Networks. That deal comes just two months after rival Trapeze Networks got snapped up by Belden, a cable and wiring company.
But the deal that probably scotched any potential trade sale for Meru was Brocade’s $3bn gamble on Foundry. The reason: Foundry has an OEM arrangement with Meru and was viewed as the most-likely acquirer of the WLAN equipment startup. We’re guessing Brocade probably figures it has its hands full with integrating Foundry’s existing business without adding additional pieces. Also, we view the planned Brocade-Foundry pairing as focused primarily on the datacenter, which wouldn’t have much use for WLAN equipment.
The only suitor we can put forward for Meru at this point is Juniper Networks. While Meru’s enterprise focus would fit well with Juniper, we understand the two companies kicked around a deal in 2005, at a reported $150m, but talks didnt go far. Besides, a Meru source indicated recently that the company is plugging away on an IPO for next year. (We’ve heard that from the company for more than two years , but maybe 2009 will be the year.)
For Meru to go public at a decent valuation, however, it needs both a healthy IPO market and a healthy comparable, Aruba Networks. That company is currently trading at half the level it was at the start of the year, following a blown quarter in February. Aruba will have a chance to make amends in two weeks, as it will report results from its fiscal year on August 28.
Recent WLAN deals
Source: The 451 M&A KnowledgeBase