Brocade to acquire Foundry Networks

Brocade Communications Systems Inc. is plunking down $3 billion for Foundry Networks Inc., melding two companies with a deep presence in the data center industry and posing a direct challenge to behemoth Cisco Systems Inc.

The deal announced Monday represents an attempt by San Jose-based Brocade to expand beyond data storage equipment and begin selling machines used to shuttle Internet traffic, Cisco’s home turf.

Brocade dominates the market for a type of switch that connects servers to data storage machines.

Cisco is a small player in that area, but has long been the leading provider of routers and switches that direct Internet traffic.

That industry has become increasingly attractive as Internet traffic, particularly bandwidth-hogging video, has exploded, and companies and Internet service providers have to spend mightily to upgrade their networks.

Foundry is a smaller competitor to Cisco in that area.

The acquisition promises to make Brocade a more well-rounded competitor to Cisco, but isn’t likely to substantially dent Cisco’s dominance because Foundry Networks is considered a niche player, albeit at the high end of the market, which means the company can command higher prices and healthy profit margins.

Despite its smaller size -- Foundry had $607 million in sales last year, compared with Cisco’s $29 billion -- Foundry is known for its innovative technologies and has a loyal base of customers in the government, healthcare and financial services industries.

The purchase price Brocade agreed to pay works out to $19.25 a share, a 41% premium to Foundry Networks’ closing stock price Monday before the deal was announced.

Shares of Foundry Networks surged $4.44, or 32.5%, to $18.10 in after-hours trading. They had closed up 30 cents, or 2.3%, at $13.66 during the regular session.

Brocade shares fell $1.38, or 16.6%, to $6.95 after hours.

They closed up 6 cents at $8.33 during regular trading hours.