Why Shares of Extreme Networks Inc. Are Surging Today

By Timothy Green Markets Fool.com

What happened

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Shares of networking hardware and software provider Extreme Networks (NASDAQ: EXTR) jumped on Wednesday after the company announced that it had agreed to acquire the networking business of Avaya Inc., which filed for Chapter 11 bankruptcy in January. At 11:15 a.m. EST, Extreme Networks stock was up about 16%.

So what

Extreme Networks has agreed to pay $100 million for Avaya's networking business, which the company expects to generate over $200 million of annual revenue. Extreme Networks is the stalking-horse bidder, and a required auction process is expected to occur within three to four months. In the event that Extreme Networks fails to win the auction for Avaya's assets, the company is entitled to a break-up fee and expense reimbursement.

Image source: Extreme Networks.

Extreme Networks President and CEO Ed Meyercord expects the acquisition to drive market-share gains and cost synergies:

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The addition of Avaya's networking business is consistent with our growth strategy and will broaden Extreme's enterprise solutions capabilities by complementing our product portfolio across our vertical markets. Furthermore, we expect the Avaya business to generate over$200 millionin annual revenue, increase our market share and offer new opportunities for our customers.Although our agreement is subject to required approvals, the timing of which is uncertain, we expect the combined businesses can achieve synergies and provide accretion to Extreme's fiscal 2018 earnings and cash flow.

Now what

Stalking-horse bids are a way for a bankrupt debtor company to test the market for its assets. Extreme Networks will need to outbid other potential suitors in order to acquire the assets, but by making a stalking-horse bid, the company is entitled to fees if it loses the auction, coming out ahead either way.

The ultimate price Extreme Networks or another acquirer will pay for Avaya's networking assets is yet to be determined. Extreme Networks investors are clearly cheering the announcement, but it's far from a done deal.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.