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Extreme Networks Closed the Avaya Deal. Now What?

By Anders Bylund – Updated Jul 21, 2017 at 10:46AM

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The network equipment specialist is building a bigger and more perfect beast, one buyout at a time.

Networking equipment maker Extreme Networks (EXTR 0.85%) is almost done with its latest round of game-changing buyouts. The $100 million buyout of bankrupt rival Avaya's networking business closed on Monday.

Graffiti-artist mural of a big fish swallowing a smaller one

Image source: Getty Images.

What's going on?

Avaya is expected to add $200 million of annual revenues to Extreme's sales, which currently stand at $559 million on a trailing-12-month basis. The deal should also add to Extreme's earnings and cash flow in its fiscal year 2018, which started three weeks ago.

That leaves just one large deal in Extreme's "pending" basket. Separately, the company provided an update on the acquisition of Brocade Communication Systems' (BRCD) data-center networking business. That $55 million deal is tied to a larger agreement where Broadcom (AVGO -1.09%) is picking up the rest of Brocade for a cool $5.9 billion, but was forced to hand off the data-center piece in order to satisfy regulatory requirements.

The Broadcom/Brocade merger has been delayed by another regulatory process, but is still expected to close before the end of Brocade's fiscal year, which would be Oct. 28 this year.

If the Broadcom merger falls through, that would also stop Brocade's deal with Extreme Networks. Assuming that everything works out as planned, albeit a bit later than expected, this agreement would provide another $230 million in annual sales along with positive earnings and cash flow.

Six Ethernet cables plugged into an enterprise-grade network hub

Image source: Getty Images.

What's next?

To recap, Extreme stands to add a grand total of $430 million in yearly sales by closing these acquisitions, which would be a 77% boost from the company's current revenue levels. The final revenue tally would land near $990 million.

Management calls this post-merger beast "the third largest end-to-end enterprise networking provider," behind industry titans Juniper Networks (JNPR -0.14%) and Cisco Systems (CSCO -1.12%). Juniper's annual sales added up to $5.1 billion over the last four quarters, and Cisco's revenues tower over the sector at $48.5 billion.

So, Extreme has some catching up to do if it wants to challenge the true giants of the networking sector. But it's pretty clear that the Avaya and Brocade buys will improve Extreme's economies of scale, and bolster the company's stature at the negotiating table with prospective clients.

Closing that elusive Brocade deal could be seen as the culmination of Extreme Networks' turnaround story, turning the page to a new chapter of less desperate maneuvering. Shares have soared 158% higher in just 52 weeks, and Extreme Networks is now trading at prices not seen since the spring of 2004.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Broadcom and Cisco Systems. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Brocade Communications Systems, Inc. Stock Quote
Brocade Communications Systems, Inc.
BRCD
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$479.50 (-1.09%) $-5.30
Extreme Networks Stock Quote
Extreme Networks
EXTR
$14.28 (0.85%) $0.12
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$41.52 (-1.12%) $0.47
Juniper Networks Stock Quote
Juniper Networks
JNPR
$27.54 (-0.14%) $0.04

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