Broadcom buying Brocade Communications in $5.5B deal

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Broadcom buying Brocade Communications in $5.5B deal

Chipmaker Broadcom Ltd (O:) said on Wednesday it would buy network gear maker Brocade Communications Systems Inc (O:) for $5.5 billion to expand its fiber channel and data storage businesses, the latest in a flurry of chip sector deals. The price breaks down to $12.75 per share in an all-cash transaction, which is valued at $5.5 billion plus $0.4 billion of debt.

For Brocade, we think the deal presents fair value at almost 13X the Street's F2017 EPS estimates of $1.00 in light of the company's exposure to the declining fibre channel switching market and subscale position within several segments of IP networking.

Broadcom has apparently agreed to pay Brocade a sum of $12.75 per share. The company product's includes data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems, and displays.

That said, the acquisition will likely end up costing Broadcom considerably less than its initial $5.9 billion price tag since it will immediately sell off one of Brocade's primary business units. "Demand for storage continues to grow rapidly and this acquisition fills a key area within the enterprise storage product line". Although Wi-Fi is Ruckus's primary business, the company also has a solution for cellular networks operating in the 3.5 GHz spectrum band.

"Let me put everyone at ease by confirming that we are not getting into the systems business", Tan said on a conference call Wednesday. "We were not looking to sell the company".

The strategy going forward for Brocade's IP partners is. "We will be keeping Brocade's fiber channels and switching business, which sells to numerous same OEM our semiconductor business does, but we will divest other businesses". Broadcom is scheduled to release new Tomahawk chip products that are poised to gain momentum, Ellis explained.

"I don't think there will be a lack in buyers for the IP business", Drexel Hamilton analyst Cody Acree told Reuters, adding that companies such as Cisco, Hewlett Packard Enterprise and some Chinese firms are trying to make headway in the space. It anticipates that Brocade's fibre channel SAN business will contribute about $900 million of non-GAAP earnings before interest, taxes, depreciation and amortization in its fiscal 2018.

Brocade shares rose 10 percent to $12.36, while Broadcom's stock price edged up by 1.5 percent to $171.39 as investors assessed the acquisition.

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