Increasing competition in the semiconductor market is leading the top players to branch out and target areas with new revenue opportunities.

Although some such as Intel Corp. are venturing as far as the self-driving car industry in their quest for growth, Broadcom Ltd. is keeping its focus on the data center market. Today the chipmaker doubled down on its efforts by inking a deal to acquire network equipment maker Brocade Communications Systems Inc. for $5.9 billion, including debt. The offer represents a 47 percent premium over the company’s last closing price, which Wells Fargo analyst Jess Lubert called “fair” in a note to investors picked up by Barron’s.

Broadcom stands to gain an extensive portfolio of Fiber Channel switches that power thousands of storage-area networks worldwide. The chipmaker will also absorb the company’s Internet Protocol networking business, though Broadcom plans to sell the group after the acquisition is complete to avoid creating friction with key customers such as Cisco Systems Inc. that compete in the same area.

The divestment will include Brocade’s routers, certain data center switches and the Wi-Fi systems that it obtained through its recent purchase of Ruckus Wireless Inc. for $1.5 billion. Wells Fargo’s Lubert expects the move to create a “cloud of uncertainty” around the division that could rivals to win some market share away, which in turn might end up lowering the group’s eventual selling price.

But while finding a buyer may not be easy, the analyst believes that the acquisition of Brocade will go more or less smoothly from a financial standpoint. Broadcast expects that the company’s products will have a contribution of $800 million to its operating revenues in fiscal year 2018.

Photo courtesy of Brocade