A Broadcom (AVGO) Takeover of Brocade (BRCD) Would be 5-10% Accretive - RBC

October 31, 2016 1:44 PM EDT
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Price: $180.45 --0%

Rating Summary:
    38 Buy, 2 Hold, 0 Sell

Rating Trend: = Flat

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RBC Capital analyst Amit Daryanani weighed in on reports Broadcom Limited (NASDAQ: AVGO) could bid for Brocade Communications (NASDAQ: BRCD). Daryanani said the deal fits AVGO M&A Strategy and would be 5-10% accretive.

Daryanani commented, "There has been recent discussion (Bloomberg News, unsubstantiated) around AVGO making a bid for BRCD, we think the acquisition would be fairly logical and would fit AVGO’s historical M&A practice of acquiring companies that are 1) playing in markets with little competition (FC business is concentrated at CSCO & BRCD, Campus wifi is concentrated between CSCO, Aruba & BRCD), 2) High gross-margin asset – BRCD runs at mid to high 60% gross-margins (guided Oct-qtr for `67%) and 3) inefficient OPEX structure – BRCD has sustained low to mid 20% Op-margins for the last several years (we would think AVGO could have this at 40%+ given their historical execution). Net/net – We think assuming a 20% premium, and AVGO is able to operate BRCD assets at close to 40% Op-margins the deal would be 5-7% accretive and would fit into the narrative of doing smaller tuck-in deals."

The firm maintained a Top Pick rating and price target of $190 on AVGO.

For an analyst ratings summary and ratings history on Broadcom Limited click here. For more ratings news on Broadcom Limited click here.

Shares of Broadcom Limited closed at $169.35 yesterday.

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