Brocade Communications to buy data equipment maker Foundry for $3 billion in order to compete against the big boy on the block - Cisco.
RBC Capital Markets analyst Mark Sue said the deal made strategic sense, although it was something of a surprise since many had seen Foundry as a potential acquirer because of its relatively strong financial health.
Brocade makes data-storage network switches which are often connected to Foundry's data networking switches, meaning a combination of the two could bolster their sales channels as well as technologies, he said.
Both companies compete with industry leader Cisco, which offers a wide range of routing, switching and other networking equipment to handle the requirements of growing web use, including internet-based video and voice communications.
"Foundry and Brocade have a common foe, which is Cisco, and Cisco has a well-rounded product portfolio, so in coming together they're trying to bulk up a little bit," Sue said. "And the current environment, which is a little bit muted in terms of end demand, may be giving small and medium companies more interest in talking to each other."
Brocade said the deal was approved by Foundry's board and expected to close in the fourth quarter of calendar 2008 subject to shareholder approval.
Brocade said it would raise $1.5 billion (£0.75 billion) in debt to finance the acquisition, paying the rest with cash and equity.
The acquisition was more about growth than cost savings, Brocade said, adding that the combination would help it offer a broader range of technologies to support rising web traffic.
Brocade chief executive Mike Klayko said on a conference call that the company wanted to accelerate growth and address larger markets.
"Network traffic and data growth continues to expand at unprecedented levels. Customers and users have increased expectations for performance and reliability. They're asking for more choices and for more integrated solutions," he said.