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Broadcom snaps up Brocade for $5.9bn

We want your Fibre Channel SAN stuff, but the IP biz can take a hike

By Chris Mellor, 2 Nov 2016

As rumoured storage network switch, Ethernet switch and wireless vendor Brocade is being bought by Broadcom for $5.9bn in an all-cash transaction.

The price is for $12.75 per share, valued at approximately $5.5bn, plus $0.4bn of net debt. The cash will come from new debt financing and cash available on Broadcom's balance sheet.

As Brocade is a $2.4bn pa business, the near $6bn price is pretty good. For shareholders it's a 47 per cent premium from Brocade's closing share price on Friday, October 28.

Here's a surprise: Broadcom, with the support of Brocade, plans to divest Brocade's IP Networking business, consisting of wireless and campus networking, data centre switching and routing, and software networking solutions.

Broadcom CEO and president Hock Tan said in a statement: "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."

Brocade's CEO, Lloyd Carney, said: "Our best-in-class FC SAN solutions will help Broadcom create one of the industry's broadest portfolios for enterprise storage." Storage networking rules OK.

Broadcom thinks Brocade's FC SAN business will contribute approximately $900m of pro forma non-GAAP EBITDA (earnings before income tax, depreciation and amortisation) in its fiscal year 2018. The company clearly sees long-term value in the Fibre Channel SAN business, and thus implies it does not see hyperconverged infrastructure killing the SAN business.

And the other stuff, the IP networking gear? Tan said: "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." Carney concurred: "We will work with Broadcom as it seeks to find a buyer for our IP Networking business." The Broadcom-Brocade deal is not contingent on the sale of Brocade's IP networking business.

Stifel MD Aaron Rakers writes: "This acquisition reflects Broadcom's clear efforts to become an end-to-end, full vertically integrated player in the FC-based enterprise storage market... a market in which we/investors have continually highlighted as facing secular declines in the mid-single digit range going forward."

He points out that Brocade's Storage has declined by a 2 per cent CAGR since 2012. It gets worse. Brocade outlined expectations that the FC Switching market would decline at a 4-6 per cent CAGR going forward. Rakers says: "Brocade has a >70 per cent market share in the FC SAN switching market, in which the company has seen port shipment declines on a year-on-year basis over the past eight consecutive quarters; declining 9 per cent year on year on a trailing 12-month basis for the period ending July 2016."

And NVMe over Fabrics could impact the FC SAN market. What is Broadcom seeing here that makes Brocade worth buying?

Comment

Whatever cash an IP Networking business sale brings in will offset the $5.9bn Brocade acquisition cost. If Broadcom gets $2bn for it then Brocade and its FC SAN business will have cost just $3.9bn. We might then say Broadcom is making a $4bn bet on the FC SAN business.

Carney says Broadcom approached Brocade and not the other way round. He adds that Brocade's IP Networking business has "competitive overlap with some of Broadcom's most important customers" and that's why it has to go.

The deal is expected to close in the second half of Broadcom's fiscal year 2017, which began on October 31, subject to regulatory approvals in various jurisdictions, customary closing conditions and the approval of Brocade’s stockholders.

We imagine that synergies will be sought and there will be layoffs in Brocade's back office areas and possibly others. Brocade's FC products and technologies will live on but Brocade as a standalone business will not. The storage networking tapestry just lost one of its dominant patterns. ®

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