Extreme Networks Is The Next Major Networking Player

Extreme Networks, Inc (NASDAQ: EXTR) announced plans to purchase data center switching, routing and analytics assets that are currently part of Brocade Communications Systems, Inc. (NASDAQ: BRCD) (Sell Rated) from Broadcom Ltd (NASDAQ: AVGO), following the sale of Brocade to Broadcom next quarter.

This deal could make Extreme Networks the “next major networking player,” Wunderlich’s Matthew S. Robison said in a report. While maintaining a Buy rating on the company, the analyst raised the price target from $8 to $9.

The Deal

Extreme Networks has offered $55 million for the SRA assets. While $35 million would be paid at closing, the rest would be paid over the next five years, with potential for additional earnout amounts.

“Broadcom is a key supplier to Extreme and the SRA business lines; we view the low multiples of the deal to be in the strategic interest of Broadcom to ensure a customer with scale and strength,” Robison commented.

While the SRA facilities are located similarly to Extreme, in San Jose and Bangalore, India, customer types are also similar, albeit with greater federal concentration. The analyst added, however, that the SRA assets “address different uses than Extreme or those of the pending Avaya asset purchase.”

The SRA purchase is expected to close in early the fiscal first-quarter of 2018 and are expected to generate annual revenue of ~$230 million, with margins that are higher than the near-term corporate average targets. “We believe strategic interest in Extreme as an SRA buyer makes it is less subject to competitive bids than the Avaya purchase from bankruptcy,” Robison wrote.

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