Brocade apparently became the first storage company to see positive effects of last week’s financial bailout when it received $1.1 billion loan to help finance its $3 billion acquisition of Foundry Networks.
Brocade executives spent hours extolling the virtues of Foundry and detailing how its expansion into Ethernet networking would help the FC switch vendor at its analyst day last month, yet were grilled during the Q&A session about how they would fund the deal. Analysts worried that funding would be hard to come by with banks faltering.
Investors worried, too. Foundry shares closed at $16.26 Tuesday, below the $18.50 in cash per share that Brocade would pay in the acquisition. That means investors doubted the deal would go down.
Brocade intends to raise another $400,000 in financing, probably from a high-yield bond or convertible debt offering. Besides securing $400,000, the other remaining obstacle to a deal is the Foundry shareholder vote scheduled for Oct. 24.
The loan from Banc of America Securities, HSBC Bank, and Morgan Stanley Senior Funding seems to have increased the confidence of investors and analysts. Foundry shares opened and closed at $16.70 today, finishing up on a day when the market was down while falling short of Brocade’s purchase price.
“We believe Brocade should be able to close the deal shortly after Oct. 24th,” analyst Kaushik Roy of wrote today in a note to clients, after acknowledging “some investors were worried if Brocade could secure the $1.5B financing for the acquisition.”
Acquiring Foundry would enable Brocade to compete on a second front against FC switch rival Cisco at a time when 10-Gig Ethernet, data center Ethernet, and Fibre Channel over Ethernet (FCoE) make Ethernet more valuable in storage and in the data center.