Broadcom Makes a Shrewd Deal to Acquire Brocade

We applaud

Broadcom expects the deal to be accretive to adjusted gross margins and operating margins. Brocade’s FC storage area network, or SAN, business is highly profitable as the legacy connectivity standard of choice in enterprise storage systems. Although this business is in secular decline, we calculate that Broadcom is paying less than 7 times adjusted EBITDA for a business that won’t go away anytime soon. Brocade in total was running at high 60% adjusted gross margins and mid-20% operating margins prior to its acquisition of Ruckus Wireless. However, under Broadcom, the firm expects to run the FC SAN business at 77% gross margins and 58% adjusted operating margins as it strips out Brocade’s lower-margin IP networking business and also likely extracts other cost synergies out of FC SAN. In turn, Brocade is expected to deliver $900 million of adjusted EBITDA to Broadcom, which we view as an achievable target.

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