Broadcom (AVGO) Completes Long-Delayed Brocade Acquisition

Broadcom Limited (NASDAQ:AVGO) recently announced the completion of long-delayed acquisition of Brocade Communications Systems. The Singapore-based company paid almost $5.5 million for Brocade that will now operate as an indirect subsidiary led by Jack Rondoni. The deal boosts Broadcom’s position in the storage area networking space.

The transaction announced in November 2016 faced strict regulatory hurdles in the United States, the European Union (EU) and China. Interoperability and the misuse of competitors’ information were the primary objections to the deal.

Notably, Brocade competes directly with Cisco Systems Inc. (NASDAQ:CSCO) , while the company is a supplier for the same. Hence, Cisco was evidently apprehensive about disclosure of confidential information to its competitor.

Brocade Sold Assets to Gain Approval

In order to satisfy regulators, Brocade divested its Ruckus Wireless and ICX Switch business to ARRIS for $800 million in cash. These businesses directly competed with Cisco.

Moreover, Brocade sold its data-center switching, routing and analytics business to Extreme Networks Inc. (NASDAQ:EXTR) for $55 million.

Finally, Broadcom won the approval from the U.S. Federal Trade Commission (FTC) in July after it agreed to build a firewall to prevent misuse of Cisco’s information. Moreover, the company also agreed to separate the production facility currently working for Cisco.

Further, FTC will be appointing someone to monitor Broadcom-Brocade for five years to ensure that Cisco’s information is safe. The period may be extended for another five years.

Redomicile Plan to Help Qualcomm (NASDAQ:QCOM) Bid

Earlier this month, Broadcom announced its intent to redomicile in the United States. The company is currently incorporated in Singapore with headquarters there as well as in San Jose, CA.

The redomiciling will help Broadcom to aggressively pursue the Qualcomm bid that was recently rejected. Qualcomm believes that the current offer undervalues the company. It is also uncertain about getting regulatory support for the proposed deal.

We note that being an overseas-based company, Broadcom is subjected to scrutiny by the Committee on Foreign Investment in the United States (CFIUS).

The redomiciling will at least make the regulatory environment smooth for Broadcom, which remains committed to pursue the Qualcomm bid.

Zacks Rank & Key Picks

Broadcom has a Zacks Rank #4 (Sell).

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