Chipmaker Broadcom inks $19 bln deal to buy software company CA

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Broadcom Inc. announced an 18.9 billion-US dollar deal to buy US business software company CA Inc. on Wednesday, venturing far beyond its realm of semiconductors and testing investors’ confidence in its Chief Executive Hock Tan’s dealmaking credentials.

The CA deal, outlined in a joint statement from the companies, comes just four months after US President Donald Trump blocked Broadcom’s 117 billion-US dollar hostile bid for semiconductor peer Qualcomm Inc., arguing it posed a threat to US national security and gave an edge to Chinese companies looking to build next-generation wireless networks.

Since then, Broadcom has redomiciled from Singapore to the US, placing it formally outside the purview of the Committee on Foreign Investment in the US (CFIUS), the government panel that reviews deals for potential national security risks.

Dealmaking has been key to Broadcom’s expansion, as it grew from a 4 percent share of the chip market in 2013 to a 30 percent share this year, thanks to acquisitions spearheaded by Tan with backing from private equity firm Silver Lake.

Tan’s selection of CA as Broadcom’s next acquisition target, however, took Wall Street by surprise, and drove Broadcom shares down 7 percent in after-hours trading. Investors and analysts scrambled to identify potential synergies, as the deal looked more like a financial investment rather than a combination of complementary businesses.

“Investors will wrestle and try to gain comfort in (the) strategic rationale and its impact to capital allocation,” RBC Capital Markets analyst Amit Daryanani wrote in a note to clients, adding that “lots of explanation (is) needed.”

A Broadcom Corp. Tomahawk chip. /VCG Photo

Broadcom’s chips power smartphones, computers and networking equipment. CA, on the other hand, specializes in software for so-called mainframes, big servers that companies are gradually replacing with cloud computing, and has been seeking to expand in business software.

The disparate corners of the technology market the two companies occupy mean that Broadcom will benefit primarily from CA’s recurring revenue, rather than operational synergies.

Broadcom Chief Financial Officer Tom Krause defended the deal’s rationale in an interview, pointing to experience the company already has beyond chips, in selling networking gear to big businesses operating data centers.

Last year, Broadcom acquired networking gear company Brocade Communications Systems for 5.5 billion US dollars. Brocade’s networking gear often connects to mainframes provided by International Business Machines Corp., and those are the same mainframes that much of CA’s software caters to, Krause said.

“What we do is buy mission-critical technology businesses,” Krause said. “CA is a mission-critical technology. ... We’ve been pretty impressed not only with (CA’s) management, but also the team that CA has built around these core franchises that we value.”

Analyst Kinngai Chan of Summit Insights Group said it was unclear how Tan would apply his typical integration model to CA, which has been working to shift to the subscription billing financial model that has become common in that industry.

“We believe this planned acquisition definitely will create some uneasiness amongst its current investor base,” Chan said of Broadcom.

Source(s): Reuters