Broadcom Announces Bid to Buy Brocade In $5 Billion Deal

Computer chip maker Broadcom has announced plans to buy digital storage vendor Brocade Communications Systems, though it seems they will only strip out their Fibre Channel business and then sell off whatever remains.

For this deal, Broadcom has agreed to pay $5.5 billion for the company. It is important to remind, however, it has only been a year since Avago Technologies has agreed to pick up Broadcom for $37 billion (taking the Broadcom name in the process, too).

Broadcom president and chief executive Hock E. Tan notes, in a news release: “This strategic acquisition enhances Broadcom’s position as one of the leading providers of enterprise storage connectivity solutions [to original equipment manufactures].”

In the deal, Broadcom says that Brocade investors will receive $12.75 cash per share. More importantly, this represents a 47 percent premium to the closing price for Brocade on Friday (prior to media reports leaking that the two companies were in discussions for the acquisition). On Wednesday, Brocade’s closing price was $11.24.

The Brocade board of executives and the executive committee of Broadcom’s board have all expressed unanimous approval for the deal.

For example, Brocade chief executive Lloyd Carney comments, “We were not looking to sell the company,” in a post on the company’s website. “However, when Broadcom approached us with a compelling offer, we had an obligation to consider that offer, along with other alternative opportunities. After careful consideration, we concluded that Broadcom’s offer was in the best interests of our company and its shareholders.”

Of course, this merger is an actionable one because Broadcom’s semiconductors are among the many components that go into Brocade’s networking equipment.

Tan goes on to say, “With deep expertise in mission-critical storage networking, Brocade increases our ability to address the evolving needs of our OEM customers.”  OEM stands for “original equipment manufacturer” and they make components that are used in products made by another company.

Tan continues, “In addition, we are confident that we will find a great home for Brocade’s valuable IP networking business that will best position that business for its next phase of growth.”

After all that, Brocade shares surged 7% in premarket trading following the announcement and have climbed a total of 29% since news of the potential purchase first hit the public, on Monday.

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