(Bloomberg) -- Broadcom Ltd., whose chips are used in Apple Inc.’s iPhone and TV set-top boxes, agreed to buy Brocade Communications Systems Inc. for $5.9 billion including debt to capitalize on booming demand for cloud computing and the data centers that deliver it.
Broadcom is acquiring Brocade for technology that links computer-storage systems and allows the fast transfer of data, the company said in a statement today. It will sell off Brocade’s other networking-equipment businesses to avoid competing with its existing customers.
Hock Tan, Broadcom’s chief executive officer, has built one of the world’s biggest chipmakers in the past two years through a string of acquisitions, including the $37 billion deal with Avago Technologies Ltd. in 2015 that created the current company. He’s been at the forefront of a record run of chip-industry mergers as semiconductor makers race to keep up with rising costs and a shrinking list of customers that are demanding more from their component suppliers.
Broadcom will pay $12.75 a share for Brocade in an all-cash transaction valued at about $5.5 billion, plus $400 million in net debt. That’s a 47 percent premium to Brocade’s closing share price on Friday, before Bloomberg reported the deal was in the works. After the transaction closes, Broadcom said it plans to divest Brocade’s internet gear business, including Ruckus Wireless, which it acquired earlier this year in a deal valued at $1.5 billion.
The larger company will be able to quickly turn its latest acquisition into increasing profits, according to Cody Acree, an analyst at Drexel Hamilton. Still, Broadcom might have been better off looking elsewhere for rapid revenue growth, he said.
“You’re buying into a market that’s flat to down, and most think it’s down,” he said. Shares of Broadcom rose 1.5 percent to $171.26 at 12:48 p.m. in New York, while Brocade stock advanced 10 percent to $12.39.
Broadcom already has chips that power network switches and control storage devices, markets that provide Brocade with most of its profit. Adding Brocade’s fiber-channel switching business is “strategic and complementary,” Tan said on a conference call Wednesday. “Demand for storage continues to grow rapidly and this acquisition fills a key area within the enterprise storage product line.”
Broadcom itself was bought by Avago in May 2015. The combination vaulted the new company -- which assumed the Broadcom name -- onto the list of the world’s top 10 chipmakers. The company, which has headquarters in Singapore and San Jose, California, is now one of the most diverse in the industry, with a market value of more than $67 billion.
Tan emphasized that he doesn’t intend to use the Brocade purchase to compete with his customers by providing the equipment that they sell to data center operators.
Brocade, also based in San Jose, has struggled to find growth in networking, where it’s dwarfed by Cisco Systems Inc. Customers are turning away from the proprietary hardware and software combinations that Cisco specializes in, opting instead for open-source software and cheaper hardware built on the kind of chips that Broadcom makes.
Last year, Brocade sales rose 2 percent to $2.3 billion. That’s less than Cisco gets from its switch business in one quarter.
Upon closing, the transaction is expected to add immediately to Broadcom’s adjusted free cash flow and earnings per share, the company said. Broadcom anticipates the new business will add about $900 million to adjusted Ebitda in fiscal 2018. Broadcom also increased its long-term operating margin target to 45 percent from 40 percent, Chief Financial Officer Tom Krause said on the call.
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