Chipmaker Broadcom on Wednesday announced its $18.9 billion deal to acquire software company CA Technologies. The deal marks the Broadcom's investment beyond semiconductors realm while also appraising investors' confidence in CEO Hock Tan's deal-making credentials.
Broadcom offered $44.50 per share for CA and will fund the transaction with cash on hand, according to Reuters.T he acquisition, which has been announced by both companies, represents a strategic win for Broadcom, following its failure to takeover semiconductor peer Qualcomm Inc in its ongoing mission to acquire "mission critical technology businesses." Qualcomm acquisition deal was blocked by the U.S. President Donald Trump, arguing it would be a threat to U.S. national security.
However, Broadcom is reported to have re-domiciled to the U.S. from Singapore, officially placing it outside the scrutiny of the government panel that review deals for potential risks in national security, the Committee on Foreign Investment in the U.S. (CFIUS).
The chipmaker's expansion model has taken its toll from deal-making. Broadcom share rise this year by 30% from 4% in 2013 is credited to acquisitions spearheaded by Tan, with support from private equity Silver Lake.
Investors and analysts are scrambling to identify why CA Technologies was considered by Tan as Broadcom's next acquisition, as potential synergies between both businesses still look blurred. The acquisition took Wall Street by surprise and drove down Broadcom share by 7% in after-hours trading. CA Technologies acquisition is being considered more like an investment by many, not a merger of complementary businesses.
“Investors will wrestle and try to gain comfort in (the) strategic rationale and its impact to capital allocation, lots of explanation (is) needed.” analyst Amit Daryanani from RBC Capital Markets wrote to clients.
CA Technologies, which is currently seeking to expand in business software, specializes in software for mainframe computers and big servers which is currently replacing cloud computing. While Broadcom, on the other hand, produces chips for smartphones, networking equipment, and computers. Broadcom would only benefit from CA’s recurring revenue, instead of operational synergies, looking at the incongruent corners of the technology market both companies occupy.
Tom Krause, Broadcom Chief Financial Officer defended the deal’s rationale in an interview, disclosing the company’s experience beyond chipmaking to include selling networking gear to big firms operating data centers. Broadcom acquired Brocade Communications Systems, a networking gear company for $5.5 billion last year. The networking gears by Brocade often connect to IBM mainframes; the same mainframes taken care of by CA’s software, Krause said.
“What we do is buy mission-critical technology businesses,” Krause added. “CA is a mission-critical technology”
It is not clear how CEO Tan would integrate CA’s operation into Broadcom which is currently on a move to shift to the trending subscription billing financial model in the industry, said Summit Insight Group analyst Kinngai Chan.
“We believe this planned acquisition definitely will create some uneasiness amongst its current investor base,” Chan added, evaluating Broadcom’s surprising deal with CA.