Canaccord Genuity believes computer seller Dell Inc. is about to expand into the networking business. And as a result, it's liking the look of Brocade Communications Systems Inc.
Analyst Paul Mansky writes in a research note that Dell has been gathering the pieces to be able to offer a fully integrated IT "stack" – basically, all the pieces business customers require to build their IT systems. The one piece of the puzzle still missing, he says, is a significant networking component.
Where would it get it? Through acquisition, probably. And what would it buy? Most likely Brocade, Mr. Mansky argues.
Brocade, a Silicon Valley networking firm trading on Nasdaq, has a market capitalization of $3.3-billion (U.S.). That would be well within Dell's means: Mr. Mansky points out that Dell filed an amended shelf filing Wednesday to raise up to $3.5-billion in debt, and the company has a whopping $7-billion of cash already on hand.
"We view Brocade as the most likely target for myriad reasons. First is the absence of alternatives. Juniper [Networks Inc.] is 80 per cent service provider – not Dell's business – and Extreme [Networks Inc.] and Force10 [Networks Inc.] carry insignificant share," he writes. "Second, Brocade's Fibre Channel business should be an attractive cash engine for at least five years."
Based on existing financial fundamentals, Canaccord has a "buy" recommendation on Brocade, with a 12-month price target of $7.50 – about 7 per cent above its current market price. However, "should our more speculative M&A thesis manifest, we believe $10 is possible," Mr. Mansky asserts.
Looks like the market has taken some note of Mr. Mansky's report. Brocade's stock is up 5 per cent Thursday, at $7.02, on more than 23 million shares traded.