In response to turmoil in the credit markets, Foundry Networks (NASDAQ: FDRY) has agreed to a lower takeover price in its merger agreement with Brocade (NASDAQ: BRCD) (see Foundry-Brocade Merger Hits a Roadblock).
Foundry agreed to lower its price from more than $19 a share in cash and stock to $16.50 a share in cash, lowering the value of the deal from $3 billion to $2.6 billion. Foundry shareholders will vote on the new agreement on November 7 at 4 p.m. PST.
Foundry had given no reason for postponing last week’s merger vote, and last night’s announcement of a new deal was again short on details.
But R.W. Baird analyst Jayson Noland said in a research note this morning that the revised terms will save Brocade from paying exorbitant rates on the final $400 million bond offering it needed to finance the deal.
Those rates could have come in at more than 8 percentage points higher than inter-bank lending rates, he said, turning the deal from a break-even proposition for Brocade into a losing one. Noland said it remains to be seen how the weakened economy hits earnings of both companies, so it could still be tough for the deal to reach the break-even point, where it neither adds to nor subtracts from Brocade’s earnings.
Brocade has already raised $1.2 billion to finance the merger.
It remains to be seen if Foundry shareholders will agree to the lower price. In morning trading, Foundry shares gained 18 percent to just under $15.50, reflecting some uncertainty about whether the deal will go through. Brocade shares traded 3 percent higher this morning, but have fallen by half since the deal was announced in July. Foundry shares are down 20 percent from when the deal was first announced.
Brocade hopes to acquire Foundry to better compete with Cisco (NASDAQ: CSCO) in a new era of converged data center networks (see Brocade Takes on Cisco and Cisco, Brocade See One Big Happy Fabric).