Merger Arbitrage Blog

Broadcom Brocade merger spread is becoming tasty

The Broadcom Brocade merger spread is currently at 4.2%. If the merger is completed, investors will get $12.75 per share. The current share price as of 15/9 is $12.23. All regulatory approval had been granted except CFIUS. Application to CFIUS had been withdrawn on 17 Jul 2017 and promptly refiled. Assumming the refiling is on the same date, the new timeline (30 days review and 45 days investigation period) will end at 1st Oct.

The current Broadcom is a result of the merger of Avago and Broadcom. Avago is a Singapore registered company but is essentially a worldwide company with a good mix of executives like CEO Hock E. Tan from Malaysia (ex-Avago), CTO Henry Samueli (ex-Broadcom), CFO Thomas H Krause…etc. Based on data from Morningstar, the largest shareholders are funds like American financial services company Capital World Group and Vangard Group. The board of directors also consist of a good mix like James Diller, Kenneth Hao from Silver Lake Partners, Donald Macleod…etc.

Based on the definitive proxy statement for merger, Broadcom first became interested in Brocade's fiber channel business back in 2016. Brocade has two main business lines: Fiber channel Storage Area Network products and IP networking products. Brocade's strength has been in the fiber channel products and it accounts for almost 50% of revenue earned. Broadcom makes the chips inside these networking products and so the acquisition of Brocade will be a strategic move further up the value chain and broaden the source and diversity of Broadcom's revenue base. As a result of the focus on fiber channel, the combined company will divest its IP networking as well as the wireless division from Ruckus.

Brocade's share price had been climbing steadily from $12.30 to $12.60+ in anticipation of the successful conclusion of the merger by July as earlier indicated by the management. However, coming to July 2017 and still no indications of progress, the share price began to dip slightly. Although the companies finally received FTC approval on 3rd July, the issue of CFIUS and uncertainty of MOFCOM approval continued to weight. Finally the companies issued a statement on 17th July that the application to CFIUS had been withdrawn and refiled. The new deadline for CFIUS is now 1st Oct based on the full 75 days timeline. During this period, there is fear that the merger is going to take longer than anticipated and may endanger the walk away date of 1st Nov 2017. Even MOFCOM approval on 22nd Aug did not help much to sooth the fear. As we approach the CFIUS deadline on 15th Sep, news sources are reporting that employees from Brocade are "leaving the sinking ship…" (see article), pushing the share price down again to a low of $12.10 in recent days.

I have always liked to invest in cash mergers when there are doubts from investors. This is when we as investors can profit from knowledge and research rather than fear and uncertainty. Let me point out my thought process on why this merger is still going to be completed:

  1. Avago had merged with Broadcom with the same management team (which consist of a good mix of U.S citizens within) and also gotten CFIUS approval. So now the new Broadcom will get CFIUS approval for Brocade's merger eventually. Its only the timing issue. National security should not be an issue.
  2. Broadcom has strategic reasons to want to merge with Brocade just like why Qualcomm would like to merge with NXP semiconductors. Broadcom will likely extend the merger deadline if CFIUS cannot be approved in a timely manner.
  3. All other regulators had approved the transaction.
  4. The recent negative news about Brocade employees leaving are actually good news to the merger as Brocade prepares to trim excess headcounts early that be cut eventually when the merger is completed. This shows the confidence of both management on the success of the merger in the near future.

Below is a section on the approval timeline released by Brocade:

The Company’s stockholders approved the Merger and related matters at a special meeting of stockholders held on January 26, 2017. No further approval by the Company’s stockholders is required with respect to the Merger.

On November 30, 2016, each of the Company and Broadcom submitted a notification and report form with the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice under the HSR Act.

On July 3, 2017, the FTC accepted a proposed consent order for public comment in connection with the Merger. The FTC subsequently approved a final consent order on August 17, 2017.

On May 12, 2017, the European Commission (the “EC”) announced that it had granted conditional antitrust clearance of the Merger. As part of the EC’s clearance decision, Broadcom has agreed to certain commitments as set forth in that decision, which commitments will be monitored by a trustee. Broadcom has also committed to the EC that it will not close the Merger before the appointment of the monitoring trustee.

On May 26, 2017, the Japan Fair Trade Commission granted antitrust clearance of the Merger.

On July 17, 2017, the Company and Broadcom agreed to withdraw and re-file their joint voluntary notice to CFIUS to allow more time for review and discussion with CFIUS in connection with the Merger.

On August 22, 2017, the Ministry of Commerce of the People’s Republic of China issued a written notice that it had granted conditional approval of the Merger pursuant to the Anti-Monopoly Law of the People’s Republic of China.

Assuming timely satisfaction or waiver of all remaining closing conditions (including review and clearance by CFIUS), Brocade expects that the Merger will be completed during the fourth quarter of fiscal year 2017.

Updated: September 18, 2017 — 3:25 am

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