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Brocade Foundry bid foundering?

Suffering from shareholder wobble

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Brocade's bid to take over Foundry has stumbled because not enough Foundry shareholders are in favour of the deal.

Brocade, a dominant supplier of Fibre Channel storage area networking (SAN) switches and directors has negotiated an agreed bid to take over a Foundry Networks, a supplier of Ethernet products. Brocade needs an Ethernet capability, both to push its Ethernet SAN strategy forward using the FCoE (Fibre Channel over Ethernet) protocol and to move into general Ethernet networking product supply.

The bid agreed with Foundry management on July 21 was for a $3bn amount with Foundry shareholders receiving $18.50 cash and 0.907 of a Brocade share for each Foundry share they own, making a total offer of $18.75 per Foundry share, then trading at $13.66. Brocade shares then traded at $8.33 but have lost value since, falling to $4.43 on October 7 when Brocade announced its bid funding plan, and $2.85 at the market close on Thursday October 23. At this point Foundry shares were worth $17.04.

Foundry announced a poor third quarter that day with revenues up four per cent from Q3 07's $159.5m to $165.9m but net income down a third to $17.8m ($27.6m) as North American commercial sales declined.

Against this background Brocade's funding was in two parts; a $1.23bn loan and revolving credit facility arranged by the Bank of America and Morgan Stanley, and a $400m loan via corporate notes, making $1.63bn in total - a brave amount to be seeking in the current turbulent economic times, not least in the banking sector.

Brocade was aiming to get takers of this $400m corporate debt via an investor roadshow commencing this week.

Foundry had planned a shareholder vote on Friday to approve the Brocade bid. It put out a sudden note saying the vote had been delayed until 4pm PDT on Wednesday October 29 because of 'recent developments'. It did not explain what it meant by that phrase.

Foundry shareholders may be concerned that the Brocade shares they are receiving are not worth as much as they were when the bid was announced. A second worry may be that Brocade has not actually completed its financing and this could fail.

Foundry shares immediately sank in value, from $16.96 to $12.67 at the market close on Friday, losing a quarter of their value. Brocade shares rose from $2.85 to $3.09. General investors appear to think that Foundry is worth less without Brocade and Brocade more, at least in the short term, without Foundry. ®

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