Foundry Network Shares Rise on Deal

Shares of networking equipment maker Foundry Networks ( FDRY ) rose more than 5% Wednesday ahead of its impending $3 billion acquisition by Brocade ( BRCD).

The boost, which sent Foundry shares up to $17.10 in early trading, came a day after storage switch specialist Brocade secured a $1.1 billion loan and a $125 million revolving credit facility to fund its Foundry acquisition late Tuesday, which pushed the stocks of both firms up in after-hours trading.

"Foundry is trading at a significant discount to its acquisition price, which provides opportunity for investors," Pacific Growth Equities analyst Kaushik Roy said Wednesday in an research note. "Foundry stock closed yesterday at $16.26, which is significantly below what Brocade is offering: $18.50 (Cash) + 0.09 Brocade shares."

"The (Foundry) shareholder vote is on October 24th -- we believe Brocade should be able to close the deal shortly after," said Roy. "This $1.1B financing announcement should provide some comfort to Foundry shareholders -- we believe that the probability of Brocade's ability to close the deal is very high."

Brocade, which sells switches that use the Fibre Channel storage protocol, hopes its acquisition of Foundtry's Ethernet technology will put it a better position to compete with Cisco ( CSCO) and Juniper Networks ( JNPR ) through its acquisition of Foundry's Ethernet technology.

"Despite some merger risks we believe with the acquisition of Foundry, Brocade could be one of the top two vendors for end-to-end networking solutions," Roy writes. "In our opinion investors are overly concerned about competitive threats from Cisco -- we expect Brocade to remain the dominant provider of Fibre Channel switches throughout the life of the Fibre Channel technology."

Roy maintained his 'Buy' rating for Brocade, adding that EMC ( EMC ) could certify Brocade's Host Bus Adapters (HBAs) in the next couple of months, with other OEMs to follow.

Brocade's shares were down 37 cents, or 8.3%, to $4.06 in mid-day trading on Wednesday.

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