Broadcom Finds A Clever Way To Maintain M&A Strategy With Brocade Deal

MKM Partners is positive on Broadcom Ltd (NASDAQ: AVGO)'s plans to acquire Brocade Communications Systems, Inc. (NASDAQ: BRCD) for $5.9 billion, or $12.75/share in cash, as it is in line with Broadcom’s strategy of selling high-value solutions to top OEMs.

“With a Fibre-channel SAN acquisition and planned IP networking carve-out sale, AVGO has found a clever way, in our view, to preserve its M&A strategy,” analyst Ian Ing wrote in a note.

Ing noted that sale of SAN (Storage Area Network) appliances is entirely through a direct OEM channel, as customers like Dell Technologies Inc (NYSE: DVMT)and Hewlett Packard Enterprise Co (NYSE: HPE) bundle Fibre-channel SAN in their complete server solutions.

That said, investors are concerned over the stability of fibre channel SAN business as enterprise storage workloads are moving to the cloud. However, Broadcom believes it has a large number of customers who need dedicated and secure storage infrastructure.

“We think a dedicated BU head should be able to maximize the FC SAN opportunity at top OEMs (Dell, HPE, etc). Competitive landscape appears benign, as only Cisco sells SAN appliances as part of its bundled server offerings,” Ing highlighted.

On the planned carve-out sale of Brocade's IP Networks, MKM’s telecom analyst Michael Genovese doesn't see likely buyers among existing networking players. The analyst pointed out that it would be tough to integrate Brocade’s existing hardware and software strategies of the other networking vendors such as Cisco Systems, Inc. (NASDAQ: CSCO), Juniper Networks, Inc. (NYSE: JNPR) and Arista Networks Inc (NYSE: ANET).

“We think most of BRCD’s product portfolio would likely end up being shut down if acquired by CSCO, JNPR or ANET, making it harder to count on keeping the market share they would be purchasing,” Genovese added.

MKM maintains its Buy rating and raise its price target to $193 from $188.

At last check, shares of Broadcom were up 0.42 percent to $173.28.

Image Credit: By Cmglee (Own work) [CC BY-SA 3.0 or GFDL], via Wikimedia Commons