UPDATE 2-Brocade to buy Foundry Networks for $3 bln
(Recasts with rivals, adds executive and analyst comments, updates share move)
By Ritsuko Ando
NEW YORK, July 21 (Reuters) - Brocade Communications Systems Inc (BRCD.O) plans to buy data equipment maker Foundry Networks Inc FDRY.O for around $3 billion to bulk up its product line, a move seen helping it compete with bigger rivals like Cisco Systems Inc (CSCO.O).
Brocade, which makes data-storage network switches, said on Monday it would pay $18.50 in cash plus 0.0907 Brocade share for each Foundry share, valuing the company at $19.25 per share, or a 41 percent premium over its Monday closing price of $13.66.
RBC Capital Markets analyst Mark Sue said the deal made strategic sense, although it was something of a surprise since many had seen Foundry as a potential acquirer because of its relatively strong financial health.
Storage switches made by Brocade are often connected to Foundry's data networking switches, meaning a combination of the two could bolster their sales channels as well as technologies, he said.
Both companies compete with industry leader Cisco, which offers a wide range of routing, switching and other networking equipment to handle the requirements of growing Web use, including Internet-based video and voice communications.
"Foundry and Brocade have a common foe, which is Cisco, and Cisco has a well-rounded product portfolio, so in coming together they're trying to bulk up a little bit," Sue said. "And the current environment, which is a little bit muted in terms of end demand, may be giving small and medium companies more interest in talking to each other."
Brocade said the deal was approved by Foundry's board and expected to close in the fourth quarter of calendar 2008 subject to shareholder approval.
Foundry shares rose 33 percent to $18.11 in after-hours trade, while Brocade shares fell 17 percent to $6.90.
Foundry also announced quarterly results above market expectations on Monday, helped by stronger sales to North American service providers. For the second quarter, it reported earnings of $18.3 million, or 12 cents per share, on revenue of $160.7 million. Analysts were expecting 14 cents a share on revenue of $153.4 million, according to Reuters Estimates.
Brocade said it would raise $1.5 billion in debt to finance the acquisition, paying the rest with cash and equity.
It said it expects the deal to add to its non-GAAP earnings in its fiscal-year 2009.
The acquisition was more about growth than cost savings, Brocade said, adding that the combination would help it offer a broader range of technologies to support rising Web traffic.
Brocade Chief Executive Mike Klayko said on a conference call that the company wanted to accelerate growth and address larger markets.
"Network traffic and data growth continues to expand at unprecedented levels. Customers and users have increased expectations for performance and reliability. They're asking for more choices and for more integrated solutions," he said. (Reporting by Ritsuko Ando, editing by Phil Berlowitz and Carol Bishopric, Gary Hill)
