Irvine, Calif.-based semiconductor manufacturer Broadcom Ltd. (AVGO) announced plans to acquire network solutions provider Brocade Communications Systems Inc. (BRCD) in a deal worth $5.9 billion back in November. The large-scale buyout, one of a series of the chipmaker's mergers and acquisitions over the past year, is now undergoing an extended antitrust investigation by the Federal Trade Commission (FTC).
The FTC has issued a secondary request for information on the deal, reported Broadcom in a securities filing. The chipmaker expects the deal to close in the second half of fiscal 2017, ending Oct. 28.
Strengthened Position in SAN Switching
In acquiring San Jose, Calif.-based Brocade, Broadcom will bolster its position in the storage area network (SAN) switching market, in which it will compete fiercely with industry leader Cisco Systems Inc. (CSCO). Prior to the sale, Oppenheimer & Co. analyst Ittai Kidron indicated that “the SAN market is effectively a duopoly between Brocade and Cisco.” Within Brocade’s SAN segment, it maintains strength in the fiber channel protocol-based networking space. Analysts have concerns over whether Brocade’s 70% share of the fiber channel switching market, integrated with Broadcom’s strength in the fiber channel host bus adapter market, could serve as a red flag for FTC investigators. Broadcom faces only Cavium Inc. (CAVM) as a major competitor in the fiber channel host bus adapter market.
Also of possible concern to regulators is Broadcom’s supply arrangements to many fiber channel SAN hardware makers that currently rival Brocade, notes the Street.
In response to skepticism on the merger, Broadcom Chief Executive Hock Tan has indicated that in regards to the SAN switching segment, Cisco is “obviously a much larger company and a player in its own right,” as it possesses “a whole street of product lines, appliances, which Brocade doesn’t.” Further, due to the nature of a disrupted switching space, caused by virtualization, software-defined storage, hyperconverged infrastructure and other innovations, Tan indicates alternative technologies are changing the dynamics of the market to such that the firm does not control any particular market “by any stretch of imagination.” (See also: Broadcom Buys Brocade in $5.9 Billion Deal.)