Broadcom Sews Up $5B Deal for Brocade

Chip manufacturer Broadcom on Wednesday announced that it would buy Brocade Communications, a major supplier of fiber channel storage area networking technology to data centers, for US$5.5 billion in cash and the assumption of Brocade’s $400 million debt.

That represents a 47 percent premium over Brocade’s closing share price last week, said Brocade CEO Lloyd Carney.

The “architecture, algorithms, software [and] semiconductor chips embedded in Brocade’s fiber channel systems are what’s valuable to Broadcom,” Broadcom CEO Hock E. Tan told investors.

The acquisition is “strategically and financially compelling,” he remarked. Brocade’s fiber channel switching “is a very sustainable franchise with nominal profitability but strategic and complementary to our outcome. The demand for storage continues to grow rapidly, and this acquisition fills key areas within our enterprise storage line that our product doesn’t fill today.”

The purchase “moves Broadcom up the product stack while making it a more formidable competitor in networking,” noted Jim McGregor, a principal analyst at Tirias Research.

New networks are needed to support the “massive amounts of data being generated by the IoT,” he told the E-Commerce Times.

Network builders are employing “more flexible networking concepts, like software-defined networking and network functions virtualization,” McGregor noted, which “puts Brocade in one of the leading camps for networking solutions.”

The Bigger Picture

The purchase is in line with Broadcom owner Avago’s strategy of pushing into the data center market with the recent purchases of LSI Logic, which makes disk controllers; PLX Technology, which makes PCI-Express chips and switches; and Emulex, which makes fiber channel and Ethernet adapter cards.

Broadcom’s Trident and Dune Ethernet switch chips dominate the data center switch chip market.

Following Broadcom’s fiscal Q3 earnings report in September, analysts gave the firm a vote of confidence, raising their median price for its stock from $190 to $203.

Among the reasons given at that time:

• Apple, with which Broadcom has a multiyear supply agreement, had increased content in its smartphones by more than 20 percent each year;
• STMicroelectronics had exited the set-top box market, which increased Broadcom’s market share; and
• Future acquisitions were expected, with Qualcomm, Xilinx, Cavium and Marvell Technology identified as possible targets.

Staying Out of IP Networking

Broadcom will sell off Brocade’s IP networking business, which consists of wireless and campus networking, data center switching and routing, and software networking solutions.

“We are not getting into the systems business,” Tan asserted. “We consider our OEM customers to be strategic partners,” and the firm “has no desire to compete with them.”

Broadcom will “work with Brocade immediately” on the selloff, he said. “We know most of the logical buyers for this business very well.”

This “is a reasonable way to reduce the cost of the acquisition while strengthening bonds with a key customer like Cisco,”McGregor suggested. “I doubt they’ll make a profit on the sale, but they will from the customer in the long term.”

Market Feeding Frenzy

Broadcom’s purchase follows Qualcomm’s acquisition of chipmaker NXP for $47 billion last week, and Softbank’s acquisition of ARM Holdings for $32 billion this summer.

“There’s a bit of a feeding frenzy as this market consolidates,” noted Rob Enderle, principal analyst at the Enderle Group.

“The NXP acquisition was a warning that there are other firms in the hunt,” he told the E-Commerce Times.

“Broadcom was in the hunt, and [nobody] wants to be left standing when the music ends,” Enderle said. The market is crowded, and “it’s merge or die.”

Many market segments, such as PCs and smartphones, are slowing, and semiconductor companies need to look to new markets for growth, suggested McGregor.

Assembling competitive IP portfolios is another reason for the merger, he noted. “The more IP blocks you have to provide competitive solutions, the better positioned you are for new applications.”

That might be easier said than done, as “mergers of this size often fail,” Enderle pointe out. “The only process that seems to work, which Dell uses, isn’t widely replicated.”