Why Brocade Communications Systems, Inc. Stock Jumped Today

Image source: Brocade.

What happened

Shares of Brocade Communications Systems, Inc. (NASDAQ: BRCD) were surging today after its acquisition by Broadcom (NASDAQ: AVGO), following days of anticipation. The networking specialist had jumped 22% on Monday when news of a pending deal was first reported, and popped again today as it was completed. As of 12:52 p.m. EDT, the stock was up 10.1%. Broadcom shares were up 1.1%.

So what

Broadcom will pay $5.1 billion in cash for Brocade, valuing the target at $12.75 per share, which is a 47% premium over the stock's closing price on Friday, before reports of a deal began to pump up the share price.

In a blog post, Brocade CEO Lloyd Carney said, "We were not looking to sell the company. However, when Broadcom approached us with a compelling offer, we had an obligation to consider that offer, along with other alternative opportunities. After careful consideration, we concluded that Broadcom's offer was in the best interests of our company and its shareholders."

Now what

Both boards unanimously approved the deal, and now Brocade shareholders must vote on the acquisition. The buyout looks like a win for Brocade shareholders, as the $12.75 per share price values the company at nearly its 10-year high, and a wave of consolidation in the semiconductor industry may mean that a tie-up is in the best interest of both companies. Broadcom will absorb Brocade's storage-area network business, but the companies will look for a buyer for Brocade's IP networking business, due to a competitive overlap with Broadcom's customers.

The stock is still trading at a 3% discount to the buyout price, indicating some skepticism that the deal will go through. The transaction is expected to close within the next six months.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Broadcom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.