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Why Investors Are So Interested in Broadcom Stock

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Part 3
Why Investors Are So Interested in Broadcom Stock PART 3 OF 15

Could the Broadcom-Brocade Merger Secure Regulatory Approval?

The Broadcom-Brocade merger

Broadcom’s (AVGO) aggressive acquisition strategy has made it a market leader in the connectivity space. The latest on its acquisition list is Brocade Communications Systems (BRCD).

RBC Capital Markets analyst Amit Daryanani stated that Broadcom acquires companies that offer complementary technologies and a strong market share, and Brocade fits the bill.

Could the Broadcom-Brocade Merger Secure Regulatory Approval?

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Oppenheimer analyst Ittai Kidron noted that Brocade dominates the fiber channel SAN (storage area network) switching market with a 70% share, and that it competes mainly with Cisco Systems (CSCO). He added that Broadcom dominates the fiber channel HBA (host bus adapter) market, where it competes with Cavium (CAVM). He warned that the merger of the two companies could attract regulatory scrutiny. JPMorgan Securities analyst Harlan Sur expressed the same concern, stating that the Brocade merger could give Broadcom a monopolistic position in the fiber channel hardware market.

Antitrust authorities scrutinize Broadcom’s acquisition of Brocade

In February 2017, Broadcom received a second request for additional information from the FTC (Federal Trade Commission), which could delay regulatory approval by 30 days after the necessary documents have been submitted. The regulators could ask Broadcom to spin off some of Brocade’s businesses before approving the deal.

Broadcom’s divestment plans for Brocade

When it announced the acquisition, Broadcom stated that, to avoid direct competition with customers Arista (ANET), Cisco Systems (CSCO), and Juniper Networks (JNPR), it would retain Brocade’s fiber channel SAN switching business and divest its IP (Internet protocol) networking business.

However, some analysts believe that Broadcom might have to divest more than just the IP networking business to gain regulatory approval. Brocade’s IP networking segment provides components for wireless networking, systems on corporate campuses, and data-center switching and routing.

What if the Brocade merger fails the regulatory test?

If the Brocade merger fails to secure regulatory approval, Broadcom is not obligated to pay any reverse termination fees. However, the company is confident that it will secure the necessary approvals and close the deal by the end of fiscal 2017, which ends October 28, 2017.

Broadcom CEO Hock Tan stated that the merger is not anti-competitive for two reasons. First, Cisco is a larger company with a vast product portfolio. Second, alternative technologies are changing the nature of the switching market, resulting in Broadcom not being able to control any particular segment of the market. Next, we’ll look at synergies the Brocade merger could bring.

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