Brocade Spreads Its Wings With Foundry Buyout (BRCD, FDRY, CSCO, JNPR)

Brocade Communications Systems Inc. (NASDAQ: BRCD) has announced an agreement to acquire Foundry Networks, Inc. (NASDAQ: FDRY).  Brocade will pay a combination of $18.50 of cash plus 0.0907 shares of Brocade common stock in exchange for each share of Foundry common stock, representing a total value of $19.25. The transaction value is about $3.0 Billion (prior to dilution) and Brocade sees it as accretive in its fiscal year 2009.  It also sees non-GAAP earnings accretion to accelerate in fiscal year 2010.

If you look at the two companies combined, it sure looks like thecompany is trying to either become a miniature Cisco Systems (NASDAQ:CSCO) or at least become a Juniper Networks (NASDAQ: JNPR). On acombined basis, this would be about half the size of Juniper only about5% of Cisco.  This looks like on the surface that it is going to marry the storage solutions withenterprise and service provider networking solutions and allow thecombined company to better address customer needs on a unified basistoward converged networks.

Brocade said it will finance the buyout via a combination of cash onhand at both companies and approximately $1.5 billion of committed debtfinancing from Bank of America and Morgan Stanley.

This deal has been approved by the boards of each company and issubject to approval by Foundry’s stockholders and regulatory approvaland certain other closing conditions.  The acquisition is expected toclose in the fourth quarter of calendar year 2008.

Based upon the reaction, you can see why so much of this deal was incash rather than in stock.  Brocade had a market cap of $3.09 Billionat the close, but shares are down 18% in after-hours trading at $6.81.Foundry shares are up over 32% in after-hours trading at $18.08.  Thisstill doesn’t get the company to its 52-week high of $21.86.

Jon C. Ogg
July 21, 2008