Soon after Broadcom announced it was buying Brocade Communications for nearly $6 billion, Broadcom also declared that it would sell Brocade’s IP networking business, which includes routers, switches, and Ruckus Wireless.
The sale makes perfect sense, given that Broadcom’s networking silicon customers wouldn’t be happy about Broadcom competing against them.
The question then becomes, what happens to the IP networking side of Brocade? I see four likely outcomes:
- A private equity company buys the networking business
- Another tech vendor buys it
- The networking business gets sold piecemeal
- The networking business gets spun out
A Few Numbers
Before I dig into each outcome, here’s a few numbers to provide some context about the value of Brocade’s networking assets.
- In 2015, Brocade’s IP networking business had total revenue of $601 million for the year (vs. $1.2 billion for its Fibre Channel business).
- By comparison, Arista Networks posted revenues of $838 million in 2015, while Juniper posted full year revenues of $4.85 billion in 2015.
- In 2016, Brocade paid $1.5 billion in cash and stock for Ruckus Wireless.
- In Brocade’s Q3 2016 results, IP networking revenue was $209 million. $73 million of that revenue came from Ruckus.
These numbers tell me that a good business can be built from a product portfolio that’s earning more than half a billion dollars in revenue. It might not be a world-beater, but there’s a lot of value here.
Now, on to the options.
Option 1: Private Equity
Over the past few years, private equity firms have taken a significant interest in IT. Buyouts include Riverbed (by Thoma Bravo for $3.6 billion), SolarWinds (Thoma Bravo and Silver Lake Partners for $4.5 billion), Infoblox (Vista Equity Partners, $1.6 billion), and of course, Dell (Silver Lake Partners for $24.9 billion).
What’s in Brocade’s IP networking business to attract private equity? While it pales compared to Cisco or even Juniper, it’s in the same ballpark, revenue-wise, as Arista Networks, which, as mentioned, posted $838 million in revenue for fiscal year 2015.
And though the networking market is being buffeted by commoditization, wireless networking is growing, and Brocade has Ruckus in its portfolio. Brocade also has a stake in virtualized networking with Vyatta, and is making a play for automation with its Workflow Composer/StackStorm software.
In addition, as Greg Ferro noted in a recent Network Break, a business divorced of its Fibre Channel crutch may find the focus to compete vigorously in the switch/router/WLAN business.
In other words, there’s still a lot of value to be had. And by taking the company private, an outside investor would remove the quarterly performance pressure from the organization.
Depending on the intent of the investor, it could use that breathing space to realign the company around a long-term strategy. Or it could apply a little PE spit and polish (i.e crank up the sales machine and lay off employees) and shoot for a quick re-entry onto the public market or another sale.
Option 2: Another Tech Vendor Buys It
The same elements that would attract private equity (a tightly focused IP networking business with a robust product portfolio that generates more than half a billion in revenue) might also appeal to a tech company.
It’s unlikely that company would be a networking vendor; there’s no sense in confusing customers, inside sales, or channel partners with an entirely separate product portfolio.
But there are networking-adjacent vendors that might consider buying this business. My own wildly speculative guess is Riverbed.
The company is moving strongly into the SD-WAN market with its SteelConnect line, which pits it squarely in the branch networking category and puts into into direct competition with the likes of Cisco.
In addition, Riverbed now also has a small Ethernet switch and wireless AP business, which came from its acquisition of Ocedo, a German startup. Riverbed bought Ocedo for its SD-WAN technology, but the company also sees an opportunity to drive more product into the branches themselves. The rationale is that it gives organizations more unified policy and application controls.
I admit it’s a long shot for a company that’s focused on optimizing WAN traffic to take on a data center router and switch business, but it would be a quick way to both grow the company and diversify its offerings.
Riverbed is also already owned by a private equity firm, which may help smooth an acquisition/integration.
Option 3: Sell It For Parts
I assume Broadcom would prefer to sell the Brocade assets in one go, and I think the networking business is stronger with wired and wireless together. But if buyers don’t emerge, or an offer isn’t priced right, Broadcom would surely prefer to get something rather than nothing.
In particular, I’m thinking of Ruckus, which Brocade bought for $1.5 billion. If Broadcom can put together a quick sale of the wireless business for a similar amount, it would put a sizable dent in the debt that Broadcom is taking on.
And who might buy it? Once more I’m engaging in pure speculation, but what about Juniper Networks?
Juniper doesn’t have a strong wireless strategy outside of partnering with Aruba, which is owned by HPE. Ruckus does decent business with service providers, which is a core market for Juniper, owning its own mobile business unit would give Juniper more control over its wireless destiny.
Option 4: Spin Out
Spinning out the IP networking assets into a standalone company is option 4. As with private equity, a spin-out would get you an organization laser-focused on the networking business, with perhaps a leaner, more streamlined executive team and business processes.
However, a spin-out isn’t necessarily the best financial outcome for Broadcom because it wouldn’t walk away from these assets with a big chunk of cash. Yes, Broadcom could retain a stake in the new company, but would only get a partial share of income.
More importantly, Broadcom would have a stake in a business directly competing with its own customers. Even if it was a minority stake, I don’t know that Broadcom wants to be in this position.
If I were a betting man, I’d put my money on private equity. With interest rates so low, raising funds is cheap and there’s a lot of cash out there looking for returns. Brocade has an established customer base and a growing wireless business, and I can easily imagine a private investor finding extractable value.