Broadcom to buy Brocade for $7 billion

Chipmaker Broadcom will buy network gear maker Brocade for US$5.5 billion (A$7 billion) to expand its fibre channel and data storage businesses, the latest in a flurry of chip sector deals.

Singapore-based Broadcom, formerly Avago Technologies, is known for its connectivity chips while California-based Brocade makes networking hardware, software and storage products.

Broadcom said it planned to integrate Brocade's fibre channel storage networking products used in data centres and sell the company's IP networking business.

"We believe 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 analyst Angelo Zino said.

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

Brocade's shares were trading up 9 percent at US$12.25, while Broadcom's stock rose 1.5 percent to US$171.41.

Up to today's close, Brocade's shares had gained nearly 30 percent since Bloomberg 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 capitalisation of US$67 billion.

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

The Qualcomm-NXP deal topped Avago's US$37 billion acquisition of Broadcom last year.

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

Broadcom will sell Brocade's IP networking business due to competitive overlap with some of its most important customers, Brocade chief executive Lloyd Carney said.

Brocade's IP networking business consists of wireless networking, data centre switching and software networking solutions.

"I don't think there will be a lack in buyers for the IP business," Drexel Hamilton analyst Cody Acree said, adding that companies such as Cisco, Hewlett Packard Enterprise and some Chinese firms are trying to make headway in the space.

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

The IP networking business makes controllers and access points that help businesses offer high-speed internet to their customers.