M&A Scene At Alcatel And Brocade

Alcatel-Lucent, (NYSE:ALU), the telecommunications equipment company with annual revenue of €15.57 billion ($21.19 billion), recently made two acquisitions in the mobile applications space. Mikael Ricknäs of ComputerWorld says Alcatel-Lucent has realized the importance of applications and developers and hopes to become the intermediary between service providers and developers. Let’s take a closer look.

According to Chetan Sharma, a mobile industry analyst, the number of overall mobile apps downloads is expected to increase from over 7 billion in 2009 to almost 50 billion by 2012, growing at a CAGR of 92%. The revenue from mobile apps, which includes both paid downloads and revenue from advertising and virtual goods, is expected to increase from $4.1 billion in 2009 to $17.5 billion by 2012 at the rate of 62% CAGR.

In June, Alcatel acquired ProgrammableWeb, which hosts an online directory of over 2,000 open Web application programming interfaces (APIs) used by developers for Web, mobile, and other apps. Early this month, it followed this acquisition with that of OpenPlug, the creator of ELIPS Studio, a tool that allows developers to write and then translate an application into native code that can run on iPhones and Android-based smartphones.

Alcatel-Lucent reported second quarter revenue of €3.813 billion ($4.88 billion), up 17.4% q-o-q and down 2.4% y-o-y. Net loss was €184 million ($235.6 million) or €0.08 per share ($0.10 per ADS). It ended the quarter with a net cash position of €107 million. Q1 coverage is available here.

By operating segment, Networks revenue was €2.304 billion ($2.95 billion), up 19.5% q-o-q and down 3.4% y-o-y. Applications revenue was €489 million ($626 million), up 17.5% q-o-q and 5.8% y-o-y. Services revenue was €883 million ($1.13 billion), up 14.4% q-o-q and 1.1$ y-o-y.

Alcatel-Lucent reiterated its outlook for 2010. It said that while its supply chain is still experiencing capacity constraints, the demand for telecommunications equipment and related services is recovering owing to booming data traffic and the need to increase network efficiency. It therefore expects nominal growth of 0% to 5% for the telecommunications equipment and related services market in 2010. The stock is trading around $2.74 with market cap of about $6.19 billion. It hit a 52-week high of $4.69 on October 7, 2009, and a 52-week low of $2.25 on May 20.

Another networking player, Brocade (NASDAQ:BRCD), a data center networking company with annual revenue of $1.9 billion, recently reported third quarter revenue of $503.5 million, up 2% y-o-y and 1% q-o-q. Net income was $22 million or $0.05 per share, compared with a loss of $23.5 million or $0.06 per share last year and net income of $62.7 million or $0.05 per share last quarter. Adjusted earnings were $0.13 per share, inline with analyst estimates of $0.13 per share on revenue of $508 million. The company ended the quarter with cash and cash equivalents of $295.7 million and debt of $957 million. Q2 coverage is available here.

Its strong performance was led by its SAN business, which was up 4% q-o-q in what is normally a tough quarter. Brocade is the leader in the $2.4 billion SAN market and SAN accounts for more than 50% of its revenue.

For the fourth quarter, Brocade expects revenue of $530 million to $550 million and adjusted EPS of $0.12–$0.14 versus analyst estimates of $549.8 million and $0.15. The stock is trading around $5.88 with market cap of about $2.6 billion. It hit a 52-week high of $9.84 on October 9 of last year and a 52-week low of $4.64 on August 24.

Brocade has been rumored to be an acquisition target for the past year, and HP and Dell were seen as possible acquirers by UBS. But recently, UBS said the near-term probability of its being acquired has ebbed. Meanwhile, Jim Duffy of NetworkWorld speculates that after Dell lost out to HP on 3PAR, it might make a play for Brocade. HP yesterday announced its plans to acquire security software maker Arcsight for $1.5 billion. I agree with Jim Duffy that it is highly unlikely that HP is going to buy Brocade in the near future, but Dell may. HP’s priorities lie elsewhere.