Foundry & Brocade, When Less Is Really More (FDRY, BRCD)

Brocade Communications Systems Inc. (NASDAQ: BRCD) originally announced an acquisition of Foundry Networks, Inc. (NASDAQ: FDRY) for $18.50 of cash plus 0.0907 shares of Brocade common stock. The deal valued Foundry at $19.25 per share, or about $3 billion.  There had been many concerns from Wall Street that this merger was not going to get done and that was evident at the $13.00 price of Foundry yesterday.  But new merger terms have emerged this morning, and this still looks like it makes sense in the new environment.

The two companies have agreed to amend their previous agreement. The new dealroughly values Foundry  at $2.6 billion, which is likely better than Foundrywould be seeing if the merger never came or if it was just a standaloneentity in this horrible market and economy.

The special meetings of shareholders have also been moved to November 7,rather than today so that the companies could finalize the documents.The merger is not a definitivepact.  An agreement in principle can still come apart from either side,and we all know what has happened to the cost of raising capital sincethe deal was announced in July.

In today’s climate this merger still makes sense.  Foundry has alwaysbeen one of the lower rungs on the totem pole.  But the mix of storageservices with Brocade and the routers and switches at Foundry will give more of a complete offering to buyers than if the companieswere standalone entities.  This also will allow the companies to bettercompete against the dominance of Cisco Systems (NASDAQ: CSCO) andagainst Juniper Networks (NASDAQ: JNPR) as well.  Whether or not theycan execute is something that the combined companies will have to prove.

This merger makes sense for shareholders, even at the lower terms fromwhat was agreed to in July.  Foundry shares are up over 18% at $15.43,while Brocade shares have slid from highs and are up about 4% at $3.70.

Sometimes less is actually quite a bit more.

Jon C. Ogg
October 30, 2008