STOCKWATCH: Cisco overshadows Brocade buy

By Paul Montgomery

Brocade might have thought its acquisition of Rhapsody this week would have earned a gold star from the stock market, but concerns about competition with Cisco meant otherwise.

Brocade announced that it had bought Rhapsody just after the close of trade on Tuesday, US time (see story), but the markets reacted unfavourably on Wednesday, sending the stock diving 13 per cent from US$7.41 to US$6.40. The slump in the stock meant that the sale price, which is entirely stock-based, slumped from US$175 million to US$150 million in a single day. Investors in Rhapsody would be hoping that the stock recovers in time for the transaction's closing date in January.

Reasoning given for the pessimism by analysts included the assertion that Brocade was spending million to compete with Cisco in a market that did not exist yet: that of IP-based storage area networking.

The company's stock was downgraded on the day after the announcement by Deutsche Securities from Buy to Hold, and by Bear Stearns from Outperform to Peer Perform. These ratings cuts followed the company's announcement last week that its earning would miss estimates by 30 per cent, prompting warnings from two separate brokers last week. JP Morgan lowered its 2002 earnings per share forecast from $0.28 to $0.25 cents per share, and for 2003 from $0.48 to $0.34 a share, while Morgan Stanley cut its stock target from US$15 to US$10.

Elsewhere in the industry, it was another good week as the tech sector built on previous gains, helped by US interest rates easing and a Republican victory in US elections. Network Appliance was the best of the gainers overnight, rising 9.8 per cent from US$10.69 to US$11.74. Other stocks to enjoy gains of over five per cent on Wednesday included Veritas, Exabyte, Overland Storage, EMC, Maxtor, LSI Logic and BakBone Software.

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