In the previous part of the series, we learned that Broadcom (AVGO) is looking to leverage Brocade Communications Systems’ (BRCD) dominant position in the FC (fiber channel) SAN (Storage Area Network) market to increase its pricing.
However, there’s a catch in this strategy: Brocade’s FC business is already falling because of Broadcom’s and its other rivals’ Ethernet switches. If Broadcom raises the prices of FC switches, this mid-single-digit fall could accelerate.
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Like with its other acquisitions, Broadcom isn’t looking for any incremental cash flow or revenue growth. It’s looking to squeeze out as much cash as possible from the falling FC market. Another way it’s looking to squeeze cash from Brocade is by cutting its selling, general, and administrative expenses, thereby improving its operational efficiency and profits.
Broadcom is also looking to sell Brocade’s other businesses.
AVGO has a history of acquiring medium-sized companies and selling their non-core assets immediately. It acquired LSI in 2014 and sold its flash storage business to Seagate and Intel. It acquired Broadcom in 2015 and sold the latter’s wireless IoT (Internet of Things) business to Cypress.
Now, Broadcom is looking to keep Brocade’s FC SAN business and sell its IP (intellectual property) Networking and Global Services business, as they compete directly with the former’s key customers Cisco Systems (CSCO), Intel (INTC), and Hewlett-Packard Enterprise (HPE). Broadcom has no plans to compete with its customers and is, therefore, planning to sell the competing product portfolio.
Brocade’s IP Networking business comprises a full portfolio of wireless and campus networking, data center switching and routing, and software networking solutions. The divestiture of this business would include the Wi-Fi device maker Ruckus Wireless, which Brocade recently acquired for $1.2 billion.
Note that divestiture isn’t a condition that needs to be satisfied for the Broadcom-Brocade deal to take place.
Another way these divestitures could benefit Broadcom is by bringing in cash from sales proceeds. This, in turn, would reduce the cost of acquiring Brocade. To make this divestiture profitable, Broadcom would have to find a buyer willing to pay a premium price for Brocade’s IP Networking business.
Cisco, Juniper, and Arista may show interest in acquiring Brocade’s IP Networking business, as it could help them to expand their market shares.
While the benefits of the Brocade acquisition will take almost a year to materialize, things are turning out well for Broadcom at the moment. Next, we’ll see what kind of earnings Broadcom could post on December 8, 2016.