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Foundry Tanks on Merger Holdup

Shares of Foundry Networks Inc. (Nasdaq: FDRY) took a beating this afternoon when the company postponed the shareholders meeting that was supposed to seal the merger with Brocade Communications Systems Inc. (Nasdaq: BRCD).

Foundry shares sank as much as 43 percent this afternoon and were down $4.05 (24%) at $12.99 near the end of the trading day. Shares were trading above yesterday's close until Foundry's announcement hit the wires just before 2:00 p.m. Eastern time.

Shares of Brocade shot upwards, on the other hand -- up 44 cents (15.4%), to $3.29, late in the afternoon.

What happened? Foundry's press release mentions only "recent developments related to the transaction." Foundry's investor relations team could not immediately be reached; Brocade officials wouldn't comment, other than to say they still expect the deal to close this quarter.

The most recent thing to happen in the public eye was Foundry's third-quarter earnings report yesterday afternoon. (See Foundry Reports Q3.) But as one analyst told Light Reading, there aren't any obvious red flags there. Foundry's earnings per share of 19 cents beat analyst estimates by 2 cents, according to Reuters Research .

Until now, the biggest question about the $3 billion deal had been Brocade's ability to secure a $1.1 billion loan, a factor the company put to rest early this month. (See Brocade Secures Credit, Brocade to Acquire Foundry, and Brocade Takes Aim at Cisco (& Juniper).)

It's possible that the financing is still a problem for Brocade. "Their management was on the road to do a round of financing through last night, and I don't know what the results of that were," says Erik Suppiger, an analyst with Signal Hill Capital Group LLC .

It's possible, then, that Foundry is just giving Brocade a couple more days to get the financing sealed, Suppiger speculates. "It wouldn't seem like an unreasonable move."

Another possibility -- equally speculative, from another source -- is that Brocade wants to negotiate a better price.

Whatever the reason for the delay, sources aren't seeing signs that the deal is in jeopardy.

"Last week, there was every indication that things were moving forward," says one source, noting that Foundry salespeople were being told to start attending Brocade sales meetings.

Light Reading will update this story as more details arise.

— Craig Matsumoto, West Coast Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:28:52 PM
re: Foundry Tanks on Merger Holdup We're updating the story with some educated guesses -- namely, that things are still in flux on the Brocade side, either in terms of financing or the negotiated price.

It sounds like people still expect the deal to get closed without substantial delay, but it's hard not to wonder if something deeper is going on.
Iipoed 12/5/2012 | 3:28:52 PM
re: Foundry Tanks on Merger Holdup The understanding is Brocade cannot change the terms without an 85 million dollar penalty. BJ knows/believes the value of his company and I doubt would lower the price. I believe it is a matter of 400m that Brocade is short. The two companies have already announced a joint sales conference. FDRY will do just fine on their own and with an additional 85 million their bottom line improves.
1.1 billion in the bank no debt, not a bad place to be in this economic time.
nyc 12/5/2012 | 3:28:51 PM
re: Foundry Tanks on Merger Holdup BRCD will get if it does not already have the financing and this price is a fantastic deal for Foundry with no real other buyers in the market. BRCD is paying a very fair premium for them. Who else would buy them? Cisco? NOT, Juniper went there own way! EXTR and Force 10 have there own issues just existing right now. HP has Procurve and Virtual Connect (Broadcomm)... Nortel can barely keep the lights on....

As long as Brocade doesnt screw this up it will be a good deal for them. They will get some back office consolidation savings and be able to put to profitable companies together and live to fight another day!!!!
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