A convoluted set of interrelated
mergers over the past two years has brought together players from Singapore,
Irvine, San Jose, Suwanee (Georgia) and the UK, with the various companies in
play including ARRIS, Avago, Avaya, Broadcom, Brocade, Extreme, Motorola
Mobility, Pace and Ruckus. For customers, employees and investors in these
companies, such transactions are always disruptive to some degree, while for
the wider networking industry it is interesting to see how shareholder value is
created or destroyed by rearranging the products and development teams between
a handful of players. This piece will review the key moves in this complicated
dance sequence.
Avago a big buyer and seller
Perhaps the prime mover here is
Avago Technologies, which in May 2015 agreed to acquire Broadcom for
approximately $37 billion in a deal involving $17 billion in cash the rest in
Avago shares. As part of the deal, Avago changed its name to Broadcom. This
merger was premised on the goal of building the ‘world’s leading’ diversified
communications semiconductor company. In terms of overall annual revenue, the
combined company entered the space in the No.3 position, behind Intel (No.1)
and Qualcomm (No.2), but ahead of Texas Instruments and NXP.
Broadcom, based in Irvine,
California, was founded in 1991 by Henry Samueli and Henry T. Nicholas III, two
professors from UCLA; by the time of the deal, Broadcom had about 10,000
employees worldwide and more than 10,700 U.S. and 3,700 foreign patents. Revenue
in 2014 was $8.43 billion.
Avago traces its origins back to
1961, when it was established as the semiconductor division of Hewlett-Packard.
In 1999, it became part of the Agilent Technologies split; in 2005 Agilent sold
the division to the private equity firms of KKR and Silver Lake Partners. In
August 2008, Avago completed its initial public offering and shares began
trading on Nasdaq under the symbol AVGO.
Even prior to the mega transaction
with Broadcom, Avago had been on as acquisition binge. In 2014, it acquired LSI
for $11.15 per share in an all-cash transaction valued at $6.6 billion, but
later sold off LSI’s SSD division to Seagate and then its Axxia networking
division to Intel. In February 2015, Avago agreed to acquire Emulex, which
supplies Ethernet and Fibre Channel connectivity products to leading OEMS. In
2013, Emulex acquired Endace, a specialist in monitoring solutions.
In November 2016, Broadcom agreed
to acquire Brocade Communications Systems for $12.75 per share in an all-cash
transaction valued at approximately $5.5 billion, plus $0.4 billion of net
debt. At the time the deal was announced, Broadcom said it was motivated by
Brocade’s Fibre Channel storage area network (FC SAN) switching business, but
that it would divest Brocade’s IP Networking business, consisting of wireless
and campus networking, data centre switching and routing, and software
networking solutions. This it has since done.
In February, ARRIS agreed to
acquire Brocade’s Ruckus Wireless and ICX Switch business for $800 million in
cash, plus the additional cost of unvested employee stock awards, following the
closing of Broadcom’s acquisition of Brocade. The deal is contingent on
Broadcom closing its acquisition of Brocade, as announced on November 2, 2016, which
was approved by Brocade shareholders on January 26th. Broadcom presently
expects to close the Brocade acquisition in its third fiscal quarter ending
July 30, 2017. For ARRIS, the Ruckus deal expands its market segment into
service provider WiFi and enterprise WLAN. As a side note, Brocade acquired Ruckus
Wireless less than a year ago in a deal valued at approximately $1.5 billion,
consisting of $6.45 in cash and 0.75 shares of Brocade common stock for each
share of Ruckus common stock.
ARRIS a buyer
ARRIS began to consolidate its
position as the leading supplier in cable networking five years ago by
acquiring Motorola Home from Google for $2.35 billion in cash and stock.
Motorola Home was a leading global supplier of digital video and IPTV hardware
and software solutions for the cable, telecom, broadcast and satellite markets.
Google had acquired Motorola for $40.00 per share in cash, or a total of about
$12.5 billion, in 2012, primarily for its trove of 12,000 patents to strengthen
the intellectual property domain of its Android ecosystem.
In 2015, ARRIS acquired Pace plc,
another leading supplier of networking equipment for cable operators, for $2.1
billion (GBP 1.4 billion) is stock and cash.
Extreme also a buyer
Earlier this week, Extreme Networks
agreed to acquire Brocade Communications Systems’ data centre switching,
routing, and analytics business from Broadcom for $55 million in cash,
consisting of $35 million at closing and $20 million in deferred payments, as
well as additional potential performance based payments to Broadcom, to be paid
over a five-year term. The sale is contingent on Broadcom closing its
acquisition of Brocade.
It is interesting to note that most
of Brocade’s data centre and routing team traces its origins to Foundry
Networks, which Brocade acquired in 2008 for approximately $3 billion (the deal
was amended prior to closing in November 2008). Foundry Neworks, established in
1996 by Bobby R. Johnson, gained notoriety for a spectacular IPO in 1999 during
the height of the Internet bubble when its market capitalisation soared to $9
billion. Foundry was among the first to ship a Gigabit Ethernet switch.
In 2012, Brocade acquired Vyatta, a
Silicon Valley-based developer of virtualised networking software. Financial
terms of this deal were not disclosed. Brocade also acquired Vistapointe in
2014, a start-up based in San Ramon, California with operations in Ireland and
Bangalore, India, for its cloud-based and real-time network intelligence
solutions for mobile operators, on undisclosed terms. Vistapointe brought
expertise in data extraction, analysis and insight generation technologies that
enable mobile operators gain visibility into their mobile networks. These units
presumably form part of the sale to Extreme Networks.
Extreme Networks has also made two other
recent deals to fortify its position. Earlier this month, it entered into an
agreement with Avaya to be the stalking horse bidder to acquire its networking
business in an auction process. This deal was valued around $100 million. And in
October 2016, Extreme acquired the wireless LAN business of Zebra Technology
for $55 million in cash.
Brocade broken apart
One of the big outcomes from all
this activity is that Brocade is being broken apart into its historical
components: Fibre Channel, Ethernet switching, and the Ruckus Wireless Group. ARRIS
emerges with a broadened portfolio and Extreme Networks appears to be rejuvenated.
Most of all, Avago/Broadcom gains considerable leverage as the dominant
supplier of several key networking components and also as a deal maker who is
reshaping the industry.
