WSJ: Brocade Communications Systems and Foundry Networks were in the middle of a $3 billion deal that had investors worried for months: the price Brocade was paying for Foundry was considered too high, the financing too tenuous, the markets too vengeful.
Then they renegotiated last week, shaving $400 million off the purchase price. That should have comforted nervous investors, right?
Not so fast. Foundry’s stock rose early Thursday to $15.94 on the late Wednesday news that the deal was recut. But the shares have since traded down as investors still appear unsure about the chances for a closing. Monday, Foundry fell 34 cents to $14.51, well below the new deal price of $16.50 a share. Brocade rose 15 cents to $3.92.
Instead of firming up the deal, the two companies called the move “an agreement in principle,” which made it sound less than certain and put investors’ heartbeats back on worry mode. Foundry also pushed back the special meeting of its stockholders to vote on the deal.
In addition, the two companies resolved nothing about the deal’s financing, which is the real key to its survival. Enough buyers haven’t committed to Brocade’s planned private placement of $400 million of high-yield debt securities for the deal. Additionally, investors have been worried about a $1.1 billion term loan of Brocade’s that is related to the deal, fearing that a change in the deal’s terms would trip covenants that might cause the lenders to pull the loan. People familiar with the financing told Deal Journal that the loan is safe; the lenders could ask for renegotiation only if the new deal terms are bad for them. That shouldn’t be the case with a somewhat smaller deal.
Still, simply cutting a deal’s price doesn’t always get buyer and seller to the finish line. Some of the more notable big deals that have been renegotiated–the buyouts of Clear Channel Communications, BCE and HD Supply, to name three–endured threats of lawsuits before finally closing. Perhaps investors need to see some bad blood in Brocade’s and Foundry’s thus-far friendly deal to get some closure. |
