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Broadcom to Acquire Brocade Communications

By Evan Niu, CFA - Nov 2, 2016 at 1:48PM

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The great chip sector consolidation continues.

Image source: Broadcom.

What happened

Chipmaker Broadcom (AVGO -4.48%) has announced an offer to acquire Brocade Communications (BRCD) in all-cash deal valued at $5.9 billion (including $400 million of net debt). That values Brocade at $12.75 per share, representing a 47% premium relative to last Friday's closing price. Broadcom will fund the deal with cash on the balance sheet combined with new debt financing. The official news comes following market speculation that the two companies were putting together a deal.

"This strategic acquisition enhances Broadcom's position as one of the leading providers of enterprise storage connectivity solutions to OEM customers," Broadcom CEO Hock Tan said in a statement. "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."

Does it matter?

Broadcom is actually only interested in Brocade's fiber channel storage area network (FC SAN) business, and intends to immediately sell off the IP networking segment. Last quarter, the FC SAN business comprised 57% of revenue, with IP networking representing the remaining 43% of sales. Brocade will support the divestment process and seek a buyer for its IP networking portfolio. The company did not disclose how much it may seek to recoup from the divesture. The company expects the deal to be immediately accretive to non-GAAP free cash flow and earnings per share, and the FC SAN business should add $900 million of non-GAAP EBITDA in fiscal 2018. Broadcom expects the deal to close within the next six months.

This deal is the latest in a long string of high-profile consolidations within the semiconductor space. It hasn't even been a year since Broadcom itself merged with Avago, adopting the latter's ticker symbol. Elsewhere in the sector, there's another blockbuster acquisition on the table as well.

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Stocks Mentioned

Brocade Communications Systems, Inc. Stock Quote
Brocade Communications Systems, Inc.
BRCD
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
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