Foundry-Brocade Merger Hits a Roadblock

The planned merger between Brocade (NASDAQ: BRCD) and Foundry Networks (NASDAQ: FDRY) appears to be up in the air after Foundry abruptly postponed a shareholder vote on the deal on Friday.

Foundry gave no reason for the postponement, citing only “recent developments related to the transaction,” and neither Foundry nor Brocade officials are commenting.

The vote, which was to have been held Friday, has been rescheduled for Wednesday at 4 p.m. Pacific time.

The postponement and lack of official explanation has given rise to speculation about the state of the deal. Foundry would fetch nearly $19 a share in cash and stock under the agreement, and with its shares plunging to about $12 after the vote was delayed, observers say the reason for the delay could be financing difficulties in the tough credit market, Brocade seeking a lower price, or Foundry just not having enough votes to approve the deal.

Analyst Kaushik Roy of Pacific Growth Equities said he doesn’t think financing is an issue. Brocade is trying to do a $400 million bond offering to help finance the $3 billion deal, but since the company already has a $400 million bridge loan, it can still go ahead with the deal, he said.

The company also has another $1.2 billion credit line to help fund the deal, no small accomplishment given the rocky state of credit markets.

Roy said he doesn’t think Foundry would have problems getting enough votes to approve the merger — unless Brocade asked for a lower price.

One analyst, Erik Suppiger of Signal Hill Capital, thinks Brocade may be trying to do just that.

Brocade’s financing has likely become more expensive since the agreement was first announced, Suppiger speculated, and Brocade may have appealed to Foundry to adjust the price as a result.

“I think Brocade is doing everything they can to keep this deal together, but I suspect they’re going back to Foundry and saying we need you to work with us on this,” he said.

Foundry was upgraded by at least two Wall Street firms today on belief that the deal may still go through, with Piper Jaffray and Lazard Capital rating the company’s shares a Buy.

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).

Stay tuned. The saga could be complete as soon as Wednesday night.

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