Broadcom, Ltd bought Brocade Communications Systems today for $5.9 billion, giving the company a strong offering in networking storage business.

It’s quite a nice deal for Brocade shareholders, who gain a 47 percent premium over the $8.69 closing price last Friday night (October 28th). Under the terms of the deal, Broadcom will pay $12.75 per share.

It’s an all-cash $5.5 billion transaction with Broadcom also assuming $400 million of net debt for the total of $5.9 billion.

While Brocade has a broader networking business, under the terms of the deal, Broadcom will divest the IP networking part of the business including Ruckus Wireless, a company Brocade just recently acquired.

It seems what Broadcom had its eye on was the networking storage part of the business and the company believes that by combining the two lines, they could create a powerful entity in the fibre channel Storage Area Network (SAN) business.

In a blog post on the Brocade community blog, CEO Lloyd Carney indicated his company wasn’t looking to sell, but Broadcom offered a deal so compelling they couldn’t refuse. A 47 percent share price premium will tend to do that.

But the company also saw an opportunity to create a networking storage powerhouse by combining with Broadcom. “As part of this transaction, our Storage Area Network (SAN) business, will offer a strong complement to Broadcom’s offerings and capabilities, creating one of the industry’s broadest portfolios for enterprise storage,” Carney wrote in the blog post.

Carney indicated that the two companies decided to sell the rest of the networking business because of “competitive overlap with some of Broadcom’s most important customers.” In other words, Broadcom didn’t need that part of Brocade’s business competing with what it was already offering, and it didn’t have enough unique customers to make keeping it worthwhile (and I suspect it will also help pay for the deal as well).

The nature of the deal in which they are planning to sell off parts of the business will have to create a level of uncertainty among Brocades’s current customer base. The company blog post did little to address that. Ruckus Wireless, the company it bought last April suddenly finds itself in no-man’s land with no clear understanding of who its owner will ultimately be.

Broadcom itself was sold to Avago in a massive $37 billion deal in May, 2015, but apparently can continue to make its own deals, even as part of the larger entity.

Today’s deal is expected to close in October next year, and is of course going to be subject to regulatory approval.

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