By Rex Crum, San Jose Mercury News
SAN JOSE — Broadcom said Wednesday it will acquire networking-equipment maker Brocade Communications Systems for $5.5 billion in a deal that the communications chipmaker said will improve its position in the cloud-based data-storage technology market.
Broadcom specializes in semiconductors to improve the performance of smartphones and other communications devices while Brocade’s main products are used to build storage networks inside of corporate data centers.
André Kindness, a networking industry analyst with Forrester Research, said the deal makes sense for Broadcom due to the proliferation of data storage in the cloud and companies are needing to deliver data closer, and faster to, their customers.
“The chips they make are going to be much more integrated because we are seeing data spread out everywhere,” Kindness said. “Broadcom has pretty much hit the ceiling of their growth efforts and now they have to shift to a new market.”
The deal values San Jose-based Brocade at $12.75 a share, a premium of almost 47 percent above where Brocade’s shares closed last Friday. As part of the deal, Broadcom will also acquire $400 million in debt from Brocade to bring the acquisition’s total value to $5.9 billion.
Brocade shares rose almost 10 percent to close Wednesday at $12.32, while Broadcom’s stock price climbed by 2.2 percent to finish the regular trading session at $171.39 as investors assessed the acquisition.
Hock Tan, Broadcom’s chief executive, said on a conference call to discuss the deal that it will help Broadcom “capture the growing cloud opportunity” and was being made in order to capitalize on growing trends in its customer base for more-secure storage infrastructure.
As part of the acquisition, Tan said Broadcom plans to sell off Brocade’s IP (Internet protocol) networking business and retain the company’s fiber channel storage networking switching technologies. Brocade acquired that IP business last year when it bought Ruckus Wireless for $1.5 billion.
The deal is the latest in a line of high-profile acquisitions in the tech sector, and among semiconductor makers, in particular.
Last week, Qualcomm said it would acquire automotive semiconductor maker NXP Semiconductors for $38 billion. That deal topped the $37 billion that Avago Technologies paid for Broadcom last year. The company retained the Broadcom name following that deal’s completion.
“This is basically a part of ongoing industry consolidation,” said Rob Enderle, director of technology consultancy the Enderle Group. “(There are) too many networking companies and economies of scale disadvantages coupled with margin pressures drive companies like this together. We’ll likely see a lot more mergers like this over the next several years as the market adjusts to the cloud model and everything as a service models.”
The deal still needs the approval of federal regulators and Brocade shareholders. In addition to its switching-technology products, Brocade is also known for the controversy more than a decade ago involving former CEO Gregory Reyes.
In 2006, Reyes resigned from the company when he was indicted on charges of illegally backdating stock options. Reyes was convicted on 10 counts of backdating stock options illegally in 2007 and in 2010, was sentenced to 18 months in prison and fined $15 million. Reyes was released from prison in December 2011.
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