Broadcom to buy network gear maker Brocade for $5.5 billion

(Reuters) – Chipmaker Broadcom said it would buy Brocade Communications Systems for $5.5 billion, pushing deeper into the fast-growing market for network equipment used in data centers.

The deal, the latest in a consolidating chip sector, will allow Broadcom to corner a larger share of the data center products market by using Brocade’s fiber channel switches that speed up data transfer between servers and storage devices.

Singapore-based Broadcom, formerly Avago Technologies, is known for its connectivity chips used in products ranging from mobiles to servers, while California-based Brocade makes networking switches, software and storage products.

“The deal is highly complementary to Broadcom’s existing enterprise storage offerings and boosts its exposure to the high-growth data center market,” CFRA Research Angelo Zino said.

The market for IT infrastructure products is expected to expand rapidly. Total spending on cloud infrastructure, including server, storage and ethernet switches, will increase by 15.5 percent to $37.1 billion in 2016, according to research firm IDC.

Broadcom said it planned to sell Brocade’s networking business, which makes controllers and access points that help businesses offer high-speed internet to their customers, to avoid competing with its top customers such as Cisco.

“We are very strategic with divestitures. There’s logical buyers in the networking space for this business,” Broadcom’s chief financial officer Tom Krause said in an interview.

The $12.75 per share offer represents a premium of 46.7 percent to Brocade’s close on Friday.

Brocade’s shares closed up 9.6 percent at $12.32, while Broadcom’s stock closed 2.2 percent higher at $172.56

Up to Tuesday’s close, Brocade’s shares had gained nearly 30 percent since it was reported on Monday that the company was in talks to sell itself.

The chip industry has been undergoing rapid consolidation as companies try to capture market share, much of it related to connected devices and cars, and Avago/Broadcom has been one of the sector’s most prolific acquirers.

Since taking over the top job at Avago a decade ago, Chief Executive Hock Tan has turned around a small chipmaker into a giant with a market capitalization of $67 billion.

In the biggest chip deal ever, smartphone chipmaker Qualcomm agreed last week to buy NXP Semiconductors for about $38 billion, making it the leading supplier to the fast-growing automotive chips market.

When asked about the recent burst of M&A ahead of the U.S. election, Krause, the CFO, said it is not about election timing but strong and less volatile equity and debt capital markets that have given companies confidence to transact. He said he expects activity to continue as long as markets remain stable.

The Qualcomm-NXP deal topped Avago’s $37 billion acquisition of Broadcom Corp last year that formed Broadcom Ltd.

Broadcom’s top customers include Cisco, Hewlett Packard Enterprise and Intel.

A big part of Brocade’s networking business that Broadcom plans to divest was acquired as part of Brocade’s $1.5 billion acquisition of Ruckus Wireless earlier this year. The unit generated $209 million in product revenue in the third quarter.

Reuters reported on Tuesday that a Broadcom-Brocade deal was imminent and that the networking business would be divested.

Broadcom said it would take on about $400 million of Brocade’s debt and fund the deal with available cash and debt.

Evercore was Brocade’s financial adviser while Bank of Montreal was Broadcom’s lead adviser.

(Reporting by Supantha Mukherjee in Bengaluru, additional reporting by Aishwarya Venugopal; Editing by Sriraj Kalluvila and Stephen Coates)