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FTC to force Broadcom to build a firewall to complete $5.5b Brocade takeover

Concerns over Broadcom supplying silicon to both Brocade and Cisco will see the semiconductor maker firewall its business with Cisco.
Written by Chris Duckett, Contributor

The US Federal Trade Commission (FTC) announced on Monday that an agreement with semiconductor manufacturer Broadcom will allow it to complete its $5.5 billion takeover of Brocade.

Under the proposal, the parts of Broadcom that create application-specific integrated circuits (ASICs) for Cisco will need to have separate facilities and IT systems, as well as the FTC appointing a monitor for five years, with an option to extend the monitoring for another five years thereafter.

"Broadcom is required to implement firewalls preventing the flow of Cisco's confidential business information outside of an identified group of relevant Broadcom employees, and requires a monitor to oversee compliance with the firewall provisions," an analysis for public comment [PDF] states.

"The proposed remedy effectively addresses the potential for competitive harm resulting from Broadcom misusing Cisco's competitively sensitive confidential information."

The heart of the FTC's complaint is that by Broadcom taking on Brocade, the market for fibre channel switches could be manipulated, since Broadcom would supply the only global competitors in the market: Cisco and Brocade.

"As the new owner of Brocade, Broadcom could use that information to unilaterally exercise market power or to coordinate action among Brocade and Cisco, increasing the likelihood that customers would pay higher prices for fibre channel switches, or that innovation would be lessened, according to the complaint," the FTC said.

The proposed agreement is open for 30 days, with the FTC to determine whether to make the proposal final thereafter.

Broadcom made its move for Brocade in November, in an all-cash offer worth $5.9 billion including the assumption of $400 million of Brocade debt.

The $12.75 a share offering represented a 47 percent premium on the October 28 closing price.

"This strategic acquisition enhances Broadcom's position as one of the leading providers of enterprise storage connectivity solutions to OEM customers," said Hock Tan, president and CEO of Broadcom at the time.

Once the deal is complete, a buyer will be sought for Brocade's IP Networking business.

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