Why Broadcom is buying Brocade for $5.9 bn?

Brocade for telecomsBroadcom is set to buy Brocade, a provider of storage area networking (SAN) and Internet protocol (IP) networking solutions, for $5.9 billion.

Broadcom plans to sell Brocade’s IP Networking business — wireless and campus networking, data center switching and routing, and software networking solutions.

“This strategic acquisition enhances Broadcom’s position as one of the providers of enterprise storage connectivity solutions to OEM customers,” said Hock Tan, president and CEO of Broadcom.

Shareholders of Brocade will receive a 47 percent premium from the Brocade closing share price on Friday, October 28, 2016.

Lloyd Carney, CEO of Brocade, said: “Our FC SAN solutions will help Broadcom create one of the industry’s broadest portfolios for enterprise storage.”

Broadcom anticipates that Brocade’s FC SAN business will contribute approximately $900 million of EBITDA in its fiscal year 2018.

Why Broadcom buying Brocade?

Chipset major Broadcom’s purchase of Brocade would consolidate the chip and data center systems markets and heighten competition in next-generation workloads.

Broadcom’s intent to acquire networking provider Brocade, announced Nov. 2, 2016, is another development in a steadily churning data center market increasingly characterized by substantial — and in some cases radical — business model evolutions from major long-established vendors, said Krista Macomber, senior analyst, Data Center at TBR.

As evolving, modern business requirements, such as real-time processing of exponentially growing and divergent pools of data, fundamentally disrupt long-standing IT architectures and sales models, chip, system and services vendors lean on acquisitions and divestitures to accelerate the pace at which they adapt their portfolios in tandem.

If approved, Broadcom’s $5.9 billion deal with Brocade would result in a semiconductor organization positioned to address evolving and critical storage connectivity requirements more effectively and the release of a networking systems and software organization for acquisition by a larger OEM poised to address customers’ shift to converged and software-defined data centers more comprehensively. Next-generation technologies such as cloud computing, the Internet of Things and artificial intelligence (AI) require new and more tailored processing capabilities.

As customer demand for these capabilities rises rapidly, the semiconductor industry grows unstable, with vendors applying a series of large-scale deals to maximize their future profits and longevity in this quickly evolving market. For example, Broadcom was just acquired by Avago Technologies in February for $37 billion, one of the largest technology acquisitions in history, to drive scale and better serve customers’ mobile connectivity needs. Avago Technologies subsequently adopted the Broadcom name.

Broadcom aims to access Brocade’s Fibre Channel storage-area network (SAN) switching capabilities, to capitalize on the shift to more commoditized and converged underlying data center infrastructure with more comprehensive storage connectivity capabilities. Brocade remains in a period of adaptation to the spread of convergence and virtualization across customers’ data centers and networking environments, from financial and portfolio perspectives.

The technology vendor has made astute investments to evolve its portfolio and go-to-market approach, evidenced by its May acquisition of wireless local area network (wireless LAN) vendor Ruckus Wireless. However, the heavy price tag of these investments — with Ruckus alone costing $1.2 billion — has compounded the impact of incremental network hardware commoditization on Brocade’s bottom line.

Brocade’s operating margin shrank from 21.7 percent in the year-ago quarter (roughly $120 million) to 3.5 percent (approximately $21 million) in 2Q16, hindered largely by nearly $15 billion in acquisition- and integration-related expenses.

Broadcom’s integration of Brocade’s Fibre Channel SAN capabilities would improve its ability to compete with semiconductor vendors such as NVIDIA and Qualcomm and enable it to capitalize on burgeoning trends such as AI that require more agile and comprehensive storage connectivity. Broadcom would seek to sell Brocade’s IP Networking business, which includes heritage Ruckus Wireless LAN assets, as well as Brocade’s campus networking, data center switching and routing, and network software offerings due to competitive overlap.

Brocade’s IP Networking business represents a mature organization with established, proven brand cachet and large market share. As a result, it would be a viable candidate for acquisition. Dell Technologies might consider acquiring the entity to round out its convergence-led and network-augmented foray across customers’ next-generation data centers. There’s potential for Nokia Networks to purchase the assets, seeking to tap Brocade’s established traction in the enterprise segment as Nokia Networks seeks to diversify its revenue base to offset its shrinking core telecom business.

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