UPDATE 2-Brocade to buy Foundry Networks for $3 bln

(Recasts with rivals, adds executive and analyst comments, updates share move)

By Ritsuko Ando

NEW YORK, July 21 (Reuters) - Brocade Communications Systems Inc (BRCD.O) plans to buy data equipment maker Foundry Networks Inc FDRY.O for around $3 billion to bulk up its product line, a move seen helping it compete with bigger rivals like Cisco Systems Inc (CSCO.O).

Brocade, which makes data-storage network switches, said on Monday it would pay $18.50 in cash plus 0.0907 Brocade share for each Foundry share, valuing the company at $19.25 per share, or a 41 percent premium over its Monday closing price of $13.66.

RBC Capital Markets analyst Mark Sue said the deal made strategic sense, although it was something of a surprise since many had seen Foundry as a potential acquirer because of its relatively strong financial health.

Storage switches made by Brocade are often connected to Foundry's data networking switches, meaning a combination of the two could bolster their sales channels as well as technologies, he said.

Both companies compete with industry leader Cisco, which offers a wide range of routing, switching and other networking equipment to handle the requirements of growing Web use, including Internet-based video and voice communications.

"Foundry and Brocade have a common foe, which is Cisco, and Cisco has a well-rounded product portfolio, so in coming together they're trying to bulk up a little bit," Sue said. "And the current environment, which is a little bit muted in terms of end demand, may be giving small and medium companies more interest in talking to each other."

Brocade said the deal was approved by Foundry's board and expected to close in the fourth quarter of calendar 2008 subject to shareholder approval.