Continuing a consolidation among semiconductor companies, Broadcom (AVGO) on Wednesday said it would buy Brocade Communications Systems (BRCD) for $5.9 billion, including assumed debt. The transaction reflects Broadcom's aggressive acquisition strategy.
The payout comes to $12.75 per share in cash and marks a 47% premium from Friday's close, before reports anticipating the deal surfaced. Broadcom will assume $400 million in net debt in the transaction.
Shares of Brocade were up $1.12, or 10%, to $12.36 on Wednesday morning, while Broadcom stock gained $2.27, or 1.3%, to $171.07.
Broadcom has been a prodigious buyer. The former Avago Technologies bought Broadcom for about $37 billion in February and assumed the buyer's name. The Singapore and San Jose, Calif., chipmaker acquired Emulex for $609 million in 2014 and LSI for $6.6 billion in 2013.
Intel (INTC) also has participated in the consolidation with the $16.7 billion purchase of Altera last year, and NXP in December completed an $11.8 billion purchase of Freescale Semiconductor.
Fitch Ratings analyst Jason Pompeii suggested the deals will continue. "We believe consolidation in the chip industry will continue through the intermediate term within the context of cheap financing and tepid demand in more mature semiconductor markets," Pompeii wrote in a Wednesday report.
Acquiring Brocade will establish a larger player in storage area network, or SAN, switching. Broadcom plans to divest Brocade's internet protocol networking, which makes components for wireless networking, systems on corporate campuses and data center switching and routing, among other areas.
"The SAN market is effectively a duopoly between Brocade and Cisco," Oppenheimer analyst Ittai Kidron wrote in a note ahead of the sale, which had been anticipated. Growth in the market is limited, Kidron added, but gross margins are in the mid-70s and could improve by cost reductions or higher prices.
By exiting Brocade's IP business, the analyst added, Broadcom avoids competing directly with some of its customers in that market, including Arista Networks (ANET) , Cisco Systems (CSCO) and Juniper Networks (JNPR) .
Juniper would be a likely candidate to acquire the IP business, Kidron wrote. The IP business would address Juniper's shortcomings in markets such as wireless local area networking and campus networking.
Broadcom will issue new debt and draw on cash already on its balance sheet to finance the deal, which it expects to close in the second half of fiscal 2017.
Evercore Partners bankers Jeff Reisenberg, Naveen Nataraj, Stu Francis, Chris Keuler, Preston Comey, Kenny Yung and Jessica Yi advised Brocade, which received counsel from Martin Korman and Brad Finkelstein of Wilson Sonsini Goodrich & Rosati.
Christopher Kaufman of Latham & Watkins advised Broadcom. --David Marcus contributed to this report.