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Broadcom to Acquire Brocade for $5.9 Billion

Retaining FC SAN switching business and divesting IP networking business
This is a Press Release edited by on 2016.11.04

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Broadcom Limited and Brocade Communications Systems, Inc. have entered into a definitive agreement under which Broadcom will acquire Brocade, in FC SAN switching and IP networking, for $12.75 per share in an all-cash transaction valued at approximately $5.5 billion, plus $0.4 billion of net debt.

Broadcom expects to fund the transaction with new debt financing and cash available on its balance sheet. The company, with the support of Brocade, plans to divest Brocade's IP networking business, consisting of wireless and campus networking, data center switching and routing, and software networking solutions.

"This strategic acquisition enhances Broadcom's position as one of the leading providers of enterprise storage connectivity solutions to OEM customers," stated Hock Tan, president and CEO, Broadcom. "With deep expertise in mission-critical storage networking, Brocade increases our ability to address the evolving needs of our OEM customers. In addition, we are confident that we will find a great home for Brocade's valuable IP networking business that will best position that business for its next phase of growth."

"This transaction represents significant value for our shareholders, who will receive a 47% premium from the Brocade closing share price on Friday, October 28, 2016, and creates new opportunities for our customers and partners," said Lloyd Carney, CEO, Brocade. "Our best-in-class FC SAN solutions will help Broadcom create one of the industry's broadest portfolios for enterprise storage. We will work with Broadcom as it seeks to find a buyer for our IP networking business which includes a full portfolio of open, hardware and software-based solutions spanning the core of the data center to the network edge."

Upon closing, the transaction is expected to be immediately accretive to Broadcom's non-GAAP free cash flow and earnings per share. Broadcom currently anticipates that Brocade's FC SAN business will contribute approximately $900 million of pro forma non-GAAP EBITDA in its fiscal year 2018.

The board of directors of Brocade and the executive committee of the board of directors of Broadcom have unanimously approved the transaction, which is presently expected to close in the second half of Broadcom's fiscal year 2017 which commenced on October 31, 2016, subject to regulatory approvals in various jurisdictions, customary closing conditions as well as the approval of Brocade's stockholders.

The closing of the transaction is not subject to any financing conditions, nor is it conditioned on the divestiture of Brocade's IP networking business.

Our Comments

It seems that Singapore-based Broadcom - successor to Avago Technologies last March and changing its name following the acquisition by Avago for $37 billion in May 2015 - has no financial limits.

Look at all these acquisitions of Avago and then Broadcom these past years for a total of more than $48 billion:
RedSwitch for an unknown amount in 2002
Gadzoox Networks for $5.8 million in 2003
Raidcore for $165 million in 2004
Sunext Design for $48 million in 2008
NetLogic for $3.7 billion in 2012
LSI for $6.6 billion in 2013
PLX for $309 million in 2014
Avago to Acquire Broadcom for $37 billion in 2015
Emulex for $606 million in 2015

You can also add other acquired firms without relation to storage including CyOptics, Nemicon Rotary Encoders, Javelin Semiconductor, and Bulk Acoustic Wave and fiber businesses from Infineon Technologies.

Remember that there were also rumors last March about the acquisition of Marvell by Broadcom that wanted to expands its controller business.

Broadcom will finish its fiscal year ended October 2016 with more than $13 billion in revenue, and cash approaching $2 billion at the end of last July. And it is acquiring now $3 billion Brocade for in an all-cash transaction valued at 5.5 billion, plus $0.4 billion of net debt. Note that Brocade's cash and cash equivalents totaled $1.15 billion for the quarter ended July 30, 2016.

Broadcom is now becoming by far the worldwide leader in enterprise storage connectivity including FC switches and directors, probably beating Cisco, the only serious one with smaller Atto Technology. It is also involved in storage controllers and HBAs.

Today fabless chipmaker Broadcom has four businesses: wired infrastructure (54% of sales in 3FQ16), wireless communications (27%), enterprise storage (14% or $527 million growing to around $800 million with Brocade), and industrial and other (5%).

These last years there was a lot of move in the worldwide FC connectivity activity including HBAs as the market is declining after huge success and margins by pioneers Emulex and QLogic.

That's why it's relatively surprising to see Broadcom only retaining FC SAN switching business and divesting Brocade's IP networking business (just to quit or probably to be sold?), following the acquisition in 2008 for $2,600 million of  Foundry Networks, and comprising wireless and campus networking, data center switching and routing, and software networking solutions.

During last known financial quarter ended July 30, 2016, Brocade's SAN product revenue at $282 million was down 9% Y/Y. IP networking product revenue of $209 million, including $73 million of product revenue from Ruckus Wireless, was up 36% Y/Y. The company invest in Ethernet few years ago to enter diversify and compensate FC activity, but it was not a huge success as there is much harder competition in this field.  

In a post on the company's web site, Brocade's CEO Lloyd Carney said: "We were not looking to sell the company. However, when Broadcom approached us with a compelling offer, we had an obligation to consider that offer, along with other alternative opportunities. After careful consideration, we concluded that Broadcom’s offer was in the best interests of our company and its shareholders."

This deal is the highest price for M&As announced this year, far in front of  $1,620 for the acquisition of Dell EMC Enterprise Content Division (including Documentum, InfoArchive and Leap) by Opentext, and $1,000 million for the acquisition of QLogic by Cavium.

2015: EMC by Dell, $67,000 million
2001: Compaq by HP, $25,000 million
2015: SanDisk by Western Digital, $19,000 million
2005: Veritas by Symantec, $11,000 million
2011: Autonomy by HP, $10,300 million
1998: Digital Equipment by Compaq, $9,600 million
2015: Veritas (Symantec) by The Carlyle Group and GIC, $8,000 million
2009: Sun by Oracle, $7,400 million
2013: LSI by Avago technologies, $6.600 million
2016: Brocade by Broadcom, $5,900 million
2011: Hitachi GST by WD, $4,300 million
2005: StorageTek by Sun, $4,100 million
2000: Sterling Software by CA, $4,000 million
2000: Seagate by Suez Acquisition, $4,000 million
2006: Agere by LSI, $4,000 million