Broadcom Limited (NASDAQ:AVGO) recently received U.S. antitrust approval for the buyout of Brocade Communications Systems, per the Federal Trade Commission (FTC). The acquisition announced last November and valued at $5.5 billion, has already received approval in Europe and Japan.
Notably, Brocade Communications is a competitor of Cisco (NASDAQ:CSCO) while Broadcom is a supplier for the same. Hence, Cisco was evidently quite apprehensive about disclosure of confidential information to its competitor. The FTC stepped in and the approval of this acquisition had a strong condition involved. Per the terms of the condition, the production facility working for Cisco will be separated and a firewall will also be used to prevent the misuse of Cisco’s information.
There will be a separate information technology system, with security protocols. It can be accessed by only authorized individuals. Also, FTC will be appointing someone to monitor Broadcom-Brocade for five years to ensure that Cisco’s information is safe. The period may be extended for another five years.
How is Broadcom Poised to Benefit?
We believe this acquisition will definitely help boost Broadcom’s top line, as it enters the network storage devices market. The company has outperformed the Zacks Electronics-Semiconductors industry on a year-to-date basis. While the industry gained 21.8%, the stock returned 33% over the same time period.
We believe Broadcom is well poised to enjoy the dual growth prospects in the semiconductor market and the data storage and networking sector with its own and complementary products. All these will boost the company’s revenues in the long run.
However, increasing competition from other key players like Intel (NASDAQ:INTC) and Sumitomo Corp. (OTC:SSUMY) remains a headwind for the company.
Currently, Broadcom sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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