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July 13, 2018updated 16 Jul 2018 12:13pm

Broadcom Shares Fall Staggering £10 Billion: But It May Just Be Starting a “Wierd” Shopping Spree

Analyst views are surprisingly mixed

By CBR Staff Writer

It’s fair to say that analysts and traders are unimpressed by chip maker Broadcom’s plans to buy CA Technologies. The Singapore-based semiconductor specialist had plunged over £10 billion by Friday after the deal was announced earlier this week.

But the company may just be starting a “wierd” shopping spree.

The $18.5 billion cash acquisition “builds one of the world’s leading infrastructure technology companies”, Broadcom said, pointing in a release on the proposed deal to the fact that CA provides “significant recurring revenue”.

Markets weren’t convinced, with Broadcom falling nearly 19 percent at one point, losing over £10 billion today alone. (CA traditionally made products that run on mainframes; a far cry from the chip world. It has moved into cloud computing too and makes software to manage IT operations, digital security and project management).

Despite the market pounding, Broadcom may just be getting warmed up. After all, where chip targets are few and far between, legacy software ones aren’t. (As Computer Business Review reported in March, Broadcom’s planned $117 billion (£84 billion) takeover of US chip giant Qualcomm was blocked by an increasingly muscular Committee on Foreign Investment in the United States).

Macquarie’s Srini Pajjuri said management’s commentary suggests “the company may be looking to consolidate the fragmented infrastructure software industry, which means more deals are likely.” Let’s hope they’re better received…

Gartner analyst Mark Hung told Computer Business Review: “Broadcom has traditionally targeted companies with strong positive cash flow and high gross margins. With the consolidation in the semiconductor industry over the past decade, the pool of potential targets has shrunk significantly.”

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He added: “As a result, CA represents Broadcom’s branching out beyond the chip segment into the broader technology market. However, it’s hard to see much synergy between the two companies, whether it’s core technologies or target markets.”

broadcom

“Uniquely Positioned” Broadcom

Hock Tan, President and Chief Executive Officer of Broadcom, said, “This transaction represents an important building block as we create one of the world’s leading infrastructure technology companies. With its sizeable installed base of customers, CA is uniquely positioned across the growing and fragmented infrastructure software market, and its mainframe and enterprise software franchises will add to our portfolio of mission critical technology businesses. We intend to continue to strengthen these franchises to meet the growing demand for infrastructure software solutions.”

Tan’s move may look odd but in terms of results, he’s boosted Broadcom’s profit margins by more than 20 percentage points since 2009; it’s not the move of a naïf.

In a note to clients, SunTrust’s William Stein also came to the deal’s defense, saying: “While we understand ‘haters gonna hate’ as the software acquisition fit looks questionable, we note that ‘players gonna play’”.

The acquisition isn’t Broadcom’s first “weird deal,” he added, and the stock’s reaction looks to be overdone.

Sanford Bernstein & Associates analyst Stacy Rasgon, in a note to buy-side clients on Thursday, was also more positive than a glimpse at the AVGO (Broadcom) ticker would have anyone thinking.

She said: “On a purely financial stand-alone basis, we could argue that CA has the typical characteristics of a franchise as AVGO defines it … an extremely profitable, sticky mainframe business coexisting with an enterprise segment that appears ripe for rationalisation.”

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