Broadcom nears deal to buy Brocade: sources

November 1, 2016 3:04 PM EDT

Broadcom Limited company logo is pictured on an office building in Rancho Bernardo, California May 12, 2016. REUTERS/Mike Blake

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By Liana B. Baker

SAN FRANCISCO - Chipmaker Broadcom Ltd is nearing a deal to acquire network gear maker Brocade Communications Systems Inc in a deal that could be announced later this week, people familiar with the matter said on Tuesday.

The deal would be the latest in a wave of semiconductor consolidation sweeping the industry. Run by Chief Executive Hock Tan, the company formerly known as Avago is one of the chip sector's most prolific acquirers, having completed a $37 billion takeover this year and changing its name to Broadcom.

If the U.S.-and-Singapore-based company succeeds in buying Brocade, it would keep Brocade's fibre channel and storage business, which has roughly $1.5 billion in annual revenue, while it would aim to divest its networking business, the sources said, asking not to be named because the matter is private.

Broadcom and Brocade declined to comment. While the companies are in advanced discussions, no deal is final and talks could still fall apart, the people cautioned.

A big part of Brocade's IP networking business that Broadcom would look to divest was acquired as part of Brocade's $1.5 billion acquisition of Ruckus Wireless earlier this year. This unit generated $209 million in product revenue in the third quarter.

A deal for Brocade, whose market capitalization has risen to $4.5 billion on merger talk, would come a week after the semiconductor's industry's largest-ever tie-up when smartphone chipmaker Qualcomm Inc agreed to buy NXP Semiconductors NV for about $38 billion.

Shares of Brocade closed 6 percent higher at $11.24, while Broadcom shares closed 0.9 percent lower at $168.80 on Tuesday.

Brocade would be the latest addition to the sprawling company known as Broadcom, now the third-largest U.S. semiconductor maker by revenue, behind Intel Corp and Qualcomm Inc, with a market capitalization of $66.4 billion.

Last year, when Broadcom was called Avago, it made a push into fibre and adapters with the acquisition of Emulex. By adding Brocade's high-margin fibre unit, it would further bulk up its capabilities to help customers with the backbones of their data centers.

Morningstar analyst Brian Colello said in a research note on Tuesday his biggest concern about a potential deal would be Broadcom having to compete with some of its key customers such as Cisco Systems Inc. By disposing of Brocade's networking business, it could help mitigate this issue.

Bloomberg reported on Monday that Brocade was nearing a deal to be sold and that Broadcom was among potential buyers.

(Editing by Andrew Hay and Matthew Lewis)

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