Why Brocade Shares Rose in November 2016
Broadcom to acquire Brocade for $5.9 billion
On November 2, 2016, Broadcom (AVGO) announced that it has entered into a definitive agreement to acquire Brocade (BRCD) for $5.9 billion. This includes a cash transaction of $5.5 billion as well as $0.4 billion of net debt. Broadcom will fund this acquisition with available cash and new debt financing. Broadcom stated that it plans to divest Brocade’s IP Networking business segment.
As we discussed in the preceding part of this series, revenues from Brocade Communications’ (BRCD) IP Networking business rose 51% YoY (year-over-year) in fiscal 4Q16. This business segment consists of campus networking, WLAN (wireless LAN), data center, routing, and switching. One day after the deal was announced, Brocade’s stock rose 10%, and Broadcom’s stock rose 1%. The deal was approved by the boards of both companies.
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How will the acquisition benefit Broadcom and Brocade?
According to RBC Capital Market analyst, Amit Daryanani, Brocade’s acquisition should increase Broadcom’s earnings by 5%–7%. In the company’s press release on November 2, 2016, Broadcom President and Chief Executive Officer Hock Tan stated: “This strategic acquisition enhances Broadcom’s position as one of the leading providers of enterprise storage connectivity solutions to OEM customers. With deep expertise in mission-critical storage networking, Brocade increases our ability to address the evolving needs of our OEM customers.”
As mentioned before, Brocade’s revenue in the SAN (storage area network) business segment has been falling over the last few quarters as Ethernet Switches have replaced fiber channels. Brocade dominates the FC (fiber channel) SAN switch market with a 70% share, followed by Cisco (CSCO) and Cavium (CAVM). Brocade’s acquisition by Broadcom gives it a chance to compete with Cisco on a large scale and to offer a 47% premium to its shareholders in a rather dim market.