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Blackstone Said to Eye Brocade Buyout as Deal Interest Fades

Blackstone Group LP, the world’s largest private-equity firm, is studying a leveraged buyout of Brocade Communications Systems Inc., said a person with knowledge of the situation.

While Blackstone is in talks with Brocade, which has been seeking a buyer since 2009, reaching a deal may be difficult, said the person, who declined to be identified because the matter isn’t public. Brocade, a maker of switches for data-storage networks, had a market value of $2.65 billion as of yesterday.

“There is a very good opportunity for private-equity investors to make better of use of Brocade and its assets than the current management,” said Erik Suppiger, an analyst at JMP Securities LLC in San Francisco. “The question is whether management is receptive to a price that is attractive to private-equity investors. There are certainly investors that are receptive to prices that are below what management is looking for.”

Brocade has become more expensive as its stock rebounds from an Aug. 5 drop, when the San Jose, California-based company reported preliminary revenue and profit that fell short of its forecasts. Smaller private-equity funds such as Thoma Bravo LLC have dropped out of the sale process because Brocade is too big for their financing capabilities, said another person familiar with the matter.

Brocade gained 1.2 percent to $5.90 at 10:28 a.m. in New York trading. The stock has advanced 14 percent this year.

Stock Jump

Foundry Networks Inc., acquired by Brocade in 2008, is one of the company’s most attractive assets because of its more advanced Ethernet technology. Brocade’s fourth-quarter earnings excluding items beat analysts’ estimates, helped by record revenue in its Ethernet business.

The stock climbed 13 percent on Nov. 22, after the results were announced, raising management’s expectations for a sale price and making a deal to sell Brocade less likely, said the people with knowledge of the situation.

In July, Dell Inc. passed over Brocade to buy Force10 Networks Inc., a person with knowledge of the situation said at the time.

A spokesman for New York-based Blackstone and a spokeswoman for Brocade declined to comment. A representative of Thoma Bravo wasn’t immediately reachable for a comment.

Elliott Management Corp., the hedge fund that pushed Novell Inc. to sell itself in 2010, amassed an 8.5 percent stake in Brocade last year, gaining a position it could use to agitate for change. Elliott, based in New York, cut its stake to 7.5 percent on Jan. 13. At the time, Brocade stock had gained about 64 percent on renewed speculation about a potential sale since Elliott built its stake on Aug. 5.

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.

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