July 21 (Bloomberg) -- Brocade Communications Systems Inc., the world's largest maker of switches for data-storage networks, agreed to buy Foundry Networks Inc. for $3 billion, adding products used by telecommunications and cable service providers.

Foundry investors will get $18.50 in cash and 0.0907 share of Brocade common stock in exchange for each share they now hold, San Jose, California-based Brocade said in a statement today. That's about $19.25, or 41 percent more than Foundry's closing price today of $13.66.

The acquisition gives Chief Executive Officer Michael Klayko a faster version of Ethernet technology that is now gaining popularity in data centers. The deal, which also pits Brocade against Cisco Systems Inc.'s routers, will add to profit next year, the company said.

``They are doing this to remain the market leader in the data center,'' said Kaushik Roy, an analyst with Pacific Growth Equities in San Francisco. He recommends buying Brocade shares, which he doesn't own.

Klayko cemented Brocade's domination of the $1.7 billion data-switch business with the purchase of its closest competitor, McData Corp., completed in 2007. Brocade last year had about 65 percent of the market, while Cisco, the biggest maker of networking equipment, had 30 percent, according to Redwood City, California-based research company Dell'Oro Group.

Extended Trading

Brocade fell 16 percent to $7 in extended trading after the announcement. The shares had gained 6 cents to $8.33 at 4 p.m. New York time in Nasdaq Stock Market trading. Foundry, based in Santa Clara, California, jumped 24 percent in late trading to $18.06 after rising 30 cents to $13.66 in regular trading.

The transaction will be completed in the fourth quarter, Brocade said. The company is taking a $1.5 billion loan from Bank of America Corp. and Morgan Stanley Senior Funding Inc.

Separately, Foundry said second-quarter profit rose 17 percent to $18.3 million, or 12 cents a share, from $15.6 million, or 11 cents, a year earlier. Revenue rose 12 percent to $160.7 million, compared with the $161.4 million average estimate from analysts in a Bloomberg survey.

Brocade's products use a technology called fiber channel to transfer data. Foundry makes routers and switches based on so- called 10 Gigabit Ethernet.

``Those networks are converging,'' Roy said. He suggested in a note published last month that Brocade should buy Foundry.

Brocade expects the deal to boost profit by 5 percent in 2009 and by 10 percent in 2010, Chief Financial Officer Richard Deranleau said on a conference call. The company won't lose any revenue from overlapping customers, he said.

To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net

Last Updated: July 21, 2008 18:49 EDT