Shares of Extreme Networks, Inc. EXTR were up a significant 17% in after-hours trading on Wednesday, following its agreement with Broadcom Limited AVGO to acquire Brocade Communications’ BRCD data-center switching, analytics and routing business. This all-cash deal is worth $55 million.

Extreme Networks will pay $35 million to Broadcom at the closing of the deal. The remaining $20 million will be paid as deferred payments. Additionally, it has agreed to make performance based payments to Broadcom over a tenure of five years.

The deal is expected to close within 60 days from the completion of Broadcom’s acquisition of Brocade (which is expected to close within Jul 30, 2017).

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We note that shares of Extreme Networks have outperformed the Zacks Computer – Networking industry over the last one year. While the industry gained 19.2%, the stock appreciated a whopping 125.1% during the same time frame.

How Extreme is Poised to Benefit?

Cisco CSCO and Arista are ranked as leaders in Gartner’s Data Center Networking Magic Quadrant, 2016, followed by Brocade, Juniper Networks and Hewlett Packard Enterprise that are ranked in the challengers category.

Extreme Networks was ranked by Gartner in the niche players’ quadrant. The acquisition of Brocade’s data center assets will boost the company’s competitive position as well as top-line growth going forward. Extreme Networks expects to generate well above $230 million as annualized revenues from the acquisition. Moreover, the high-margin data center business is expected to help the company in achieving gross margin of more than 60%.

The acquired assets are also expected to boost its earnings and cash flow for fiscal 2018.

As of the last reported quarter, Extreme Networks reported total revenue of $148.1 million, which increased 6.3% on a year-over-year basis. While Product revenues were $109.8 million (up 4.2% year over year), Service revenues came in at $38.3 million (up 12.9% year over year).

The company has been taking measures to further strengthen its portfolio of data center networking business. We note that, earlier this month, the company signed an agreement to acquire Avaya’s networking business.

As per a strategy.com report, the global data center networking market is estimated to reach a whopping $23.2 billion by 2020 with the Asia-Pacific market growing at a CAGR of 14.4%.

Zacks Rank

At present, Extreme Networks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Cisco Systems, Inc. (CSCO): Free Stock Analysis Report

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Brocade Communications Systems, Inc. (BRCD): Free Stock Analysis Report

Broadcom Limited (AVGO): Free Stock Analysis Report

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