Broadcom to Acquire Brocade for $5.5 Billion

Chipmaker, Broadcom Ltd. has announced that it would acquire network gear maker, Brocade Communication Systems for $5.5 billion in order to build on it fiber channel and data storage businesses, the most recent in a wave of chip sector deals. Broadcom is known for its connectivity chips, while Brocade builds networking hardware, software and storage products.

The deal is designed to assist Broadcom in reducing its reliance on the sales of wireless chips for smartphones, a market that has begun to slow down recently. Apple Inc., the company’s largest customer, in October said that it had sold 45.5 million iPhones in the quarter ended in September, 2.5 million few than the year before.

Broadcom said that it looked to integrate Brocade’s fiber channel storage networking products used in data center’s and sell the company’s IP networking business.

Broadcom has agreed to pay $12.75 a share for brocade, a 47% premium over Brocade’s closing share value on Friday, before news outlets reported on talks a of a potential deal. Brocade’s stocks increased 10% to $12.39. Broadcom’s share rose 1% to $171.15.

“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 Angelo Zino said.

The chip industry has recently been experiencing rapid consolidation as companies are trying to capture market share and Broadcom has been one of the sector’s most prolific acquirers. Since taking his current position,  CEO Hock Tan has turned around a small chipmaker into a formidable giant in the industry with a market capitalization of roughly $67 billion.

In the largest chip deal ever, Qualcomm, a smartphone chipmaker, agreed to buy NXP Semiconductors NV for around $38 billion, turning the chipmaker into the leading supplier to the fastest growing automotive chips market. The Qualcomm NXP deal overtook Avago’s $37 billion acquisition of Broadcom Corporation last year.

Broadcom’s top customers include Cisco Systems, Hewlett Packard, and Intel. Broadcom will sell Brocade’s IP networking business due to competitive overlap. Brocade’s IP networking business consist of wireless networking, data center 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 told Reuters, adding that companies such as Cisco, Hewlett Packard Enterprise and some Chinese firms are trying to make headway in the space. A large portion of Brocade’s IP networking business was acquired as a part of Brocade’s $1.5 billion acquisition of Ruckus Wireless. The unit generated $209 million in product revenue in the third quarter.