Broadcom buys Brocade for storage network switching

Broadcom is broadening its business again. The semiconductor and fibre-optic specialist plans to acquire Brocade, a leading vendor of storage networking equipment, in an all-cash transaction valued at approximately $5.5 billion, plus $0.4 billion of net debt.

The deal comes less than a year after the company formerly known as Avago closed its $37 billion acquisition of Broadcom, creating the Broadcom we know today (see Avago Technologies to buy Broadcom for $37B).

Though this acquisition isn’t on the same scale, it represents a significant move up the value chain, as Brocade sells storage area networking (SAN) switching hardware rather than chips and components. Together the companies hope to create one of the industry’s broadest portfolios for enterprise storage.

“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 chief executive officer of Broadcom. “With deep expertise in mission-critical storage networking, Brocade increases our ability to address the evolving needs of our OEM customers.”

The deal is all about storage networking; Broadcom doesn’t plan to retain Brocade’s IP networking business. The companies will work together to find a buyer for Brocade’s IP networking business, which consists of wireless and campus networking, data centre switching and routing, and software networking solutions, including the recently acquired Ruckus Wireless.

Broadcom expects to fund the Broadcom acquisition with new debt financing and cash available on its balance sheet.

Upon closing, the transaction is expected to immediately add to Broadcom’s bottom line. Broadcom currently anticipates that Brocade’s Fibre Channel SAN business will contribute about $900 million in earnings (EBTIDA) in its fiscal year 2018.

The boards of directors at Brocade and Broadcom have unanimously approved the transaction, which is expected to close in the second half of Broadcom’s fiscal year 2017, 6–12 months from now. The deal is subject to the usual regulatory approvals and closing conditions as well as the approval of Brocade’s stockholders.

Lloyd Carney, chief executive officer of Brocade, sounds pleased with the deal. “This transaction represents significant value for our shareholders, who will receive a 47 per cent premium from the Brocade closing share price on Friday, October 28, 2016, and creates new opportunities for our customers and partners,” he said.

The acquisition does not depend on the successful divestiture of Brocade’s IP networking business. “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,” said Broadcom’s Hock Tan.

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