Consolidation in the chip manufacturing sector continued this week as executives from Broadcom Ltd announced that they were about to complete the acquisition of Brocade Communications Systems for around $6 billion.
The deal continues Broadcom’s efforts to push deeper into the prominent data centre network hardware market and will allow the company to utilize Brocade’s high quality fiber channel switches to grab a larger portion of the data centre market.
Brocade produce switches that increase data transfer speeds between storage devices and servers, and the U.S.-based firm is well known for their other storage and software products also.
“Data centre hardware is a very rapidly growing area of the tech industry as customers demand higher speeds for their large files,” said Charles Sutton, Director of Investment Management Division at CTI China Renaissance in an email to clients.
“Broadcom have made previous moves in M&A in the sector and the current deal will compliment their portfolio as this will boost their exposure to the data centre market significantly,” Sutton added.
According to a recent research paper by IDC, total spending on IT cloud infrastructure products is expected to balloon nearly 20 percent to around $40 billion by the end of this year, with the biggest selling products being servers, switches and storage.
Broadcom said in a statement that the networking arm of Brocade's operations would immediately be sold off as they don’t want to compete with some of their main clients, such as Cisco Systems.
Tom Krause, Broadcom’s CFO said, “The networking area may cause us a conflict of interest were we to hold to it, so the logical solution would be to offload that part of the company. There are dozens of interested parties already for the unit.”
Brocade’s shares jumped 12 percent on the New York Stock Exchange morning session after the news broke while Broadcom’s stock went up 3 percent.
Broadcom CEO Hock Tan has been pushing the company to be a prime mover in the sector in the last few years in order to capture larger percentages of the market. He has been hailed as a visionary in the industry after taking Broadcom from a small chip manufacturer to one of the sector’s biggest players.
Another major force in the field, Qualcomm Inc, recently closed a deal to purchase a semiconductor business for nearly $40 billion, making it the world’s largest automotive chipmaker.
