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Broadcom Buys Brocade for $5.9B, Will Ditch Ruckus & IP Biz

Comms chipmaker Broadcom said Wednesday that it will buy Brocade for $5.9 billion to get its hands on the company's storage business, and plans to sell off Brocade's various data networking units. (See Broadcom Bags Brocade for $5.9B.)

Under the terms of the deal, Broadcom Corp. (Nasdaq: BRCM) will acquire Brocade Communications Systems Inc. (Nasdaq: BRCD) for $5.5 billion in cash, plus $0.4 billion of net debt. The deal is expected to close by the fall of 2017. Upon completion, Broadcom says that the deal will start to bring in money, adding an anticipated $900 million of pro-forma non-GAAP EBITDA for the chipmaker's financial year 2018, which starts at the end of October 2017.

The most interesting aspect of the deal is that Broadcom will seek to find a buyer -- or maybe buyers -- for Brocade's wireless and campus networking, data center switching and routing and software networking offerings, which make up its successful data networking business.

This will include Ruckus Wireless Inc. , which Brocade bought in April for $1.2 billion. At the time Brocade said that Ruckus would give it the chops to move into a 5G future. (See Brocade's $1.2B Ruckus Buy to Raise 5G Game.)

That move seems surprising since Broadcom is already a supplier of WiFi and 4G small cell chips, as well as other wireless networking silicon. Ruckus, meanwhile, had an in on the 3.5GHz small cell market with its "OpenG" program and was looking towards a future of integrated WiFi, LTE and 5G.

Since Avago Technologies Pte. bought Broadcom, however, for $37 billion in May 2015, the massive components operation may have enough know-how to work towards 5G small cells without outside acquisitions. Avago already has a suite of millimeter wave components in its portfolio, for instance. (See Avago Seals Deal to Buy Broadcom for $37B.)


For all the latest news on 5G, visit the 5G site here on Light Reading.


It should also be noted that Brocade said that Ruckus helped drive overall revenue up 7% in its last earnings report in August. SAN product revenue, meanwhile, was $282 million, down 9% year-over-year. (See Brocade Revenue Climbs on Ruckus Acquisition, But Earnings Fall Hard.)

"I assume they are selling the Brocade IP Networking business to avoid competing with their networking and wireless customers," Heavy Reading Analyst-at-Large Simon Stanley tells us.

Rumors about Broadcom buying Brocade started on Monday. At the time, Light Reading said that a buy out would be a "remarkable" move for Broadcom. As it turns out, truth is stranger than the rumor, as the chipmaker is selling the apparently growing and successful elements of Brocade to focus on a fibre SAN business that appears to be declining. (See Is Brocade for Sale?)

"Avago bought LSI and Broadcom for storage so I guess this just continues that movement," Stanley notes.

"Does Broadcom want to become an enterprise storage business?" the analyst ponders. "They are still leading in several networking chip markets including switches!"

Broadcom is trading up 2.27% at $153.04 Euros a share ($169.67) on the news. Brocade was up nearly 10% at $12.34.

— Dan Jones, Mobile Editor, Light Reading

DanJones 11/4/2016 | 1:02:02 PM
Re: Will Ericsson Bid For Brocade' Routing Business? Could be, I'm hearing a few names as possible acquirers mostly around Ruckus though.
pdonegan67 11/4/2016 | 7:47:02 AM
Will Ericsson Bid For Brocade' Routing Business? With Cisco lobbying for Ericsson and others to lower their royalty rates for Standards Essential Patents will Ericsson bid for Brocade's routing business ?
inkstainedwretch 11/2/2016 | 2:08:55 PM
Re: Might as well, might as well. Oh, sure, and next you're going to be asking for a bigger dividend? Some people are never satisfied...

;-)

-- Brian Santo
DanJones 11/2/2016 | 1:50:14 PM
Re: Might as well, might as well. Sure, keep Avago and the shareholders happy in the short-term. But in the long-term do they even have, say, a 5G strategy now?
inkstainedwretch 11/2/2016 | 1:16:30 PM
Might as well, might as well. The bottom line on the Brocade deal is literally a bottom line calculation, according to Broadcom.

The Fiber Channel storage area networking (SAN) market is at best flat, and by most estimations is slowly shrinking, while Ethernet-based options and cloud storage grow.

Broadcom has been working at consolidating the FC SAN market for a short while. Last year, while still known as Avago, it bought Emulex, which also produced components for storage networking.

Brocade is pretty much the last major customer standing in FC SAN. It makes most of its money on FC SAN, with a run rate of about $1.4 billion on operating profit a year, according to Broadcom. At the rate the business is shrinking, Broadcom should certainly be able to make its money back, and perhaps even double its bet if the FC SAN market doesn't fall off a cliff any time soon. 

Furthermore, Broadcom thinks it can reduce Brocade's costs enough to increase the margins on Brocade's FC SAN products from about 40% to 45%.

-- Brian Santo

 
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