Chipmaker Broadcom surprise bid to buy software company CA for USD 18.9 billion wiped off the same amount from its market value on Thursday, with investors and analysts struggling to find a clear reason for the deal.
Citing an acquisition with no potential synergies, investors drove the company’s shares down 19 per cent to USD 197.50 - their worst day ever. CA rose 18.5 per cent to USD 44.10.
Broadcom, which has mushroomed in value by buying out rivals in the past decade’s surge in mobile phone production, agreed on Wednesday to buy mainframe software company CA for USD 44.50 per share in cash, months after President Donald Trump blocked its USD117 billion mega-merger with Qualcomm.
While some analysts said the shift in sectoral focus might prove another masterstroke by Broadcom Chief Executive Officer Hock Tan, many raised concerns about a deal that lowers Broadcom’s top line growth to 3 per cent from 5 per cent.
“It’s the most bizarre, defocused, non-strategic acquisition of the last decade,” said Eric Schiffer, chief executive of the Patriarch Organization, a Los Angeles-based private-equity firm.
At least two analysts downgraded the stock, while two other analysts cut their price targets. Brokerage B Riley was the most bearish with a price target cut of USD 63 to USD 245.
“What the Hock?” analysts from brokerage Evercore wrote in a note. “We think investors will likely be disappointed at this deal, which seems more financial engineering/PE driven than due to any strategic rationale.”
Broadcom’s famously ambitious chief executive has built the company from a fledgeling chipmaker to a global powerhouse through a series of big deals and is widely respected by Wall Street for his business acumen.
“A new and unexpected infrastructure software initiative seems likely to create a multi-quarter share overhang,” wrote analyst Craig Ellis from B Riley.
Susquehanna analyst Christopher Rolland said the foray into the software industry may have been driven by a lack of viable options in the semiconductor industry and increased regulatory scrutiny.
CA’s main business is selling software for big, mainframe computers, in which it is second only to IBM.
But while that business generates cash flow of USD 10 billion a year, its revenue growth has been flat as more customers choose cloud services over old-fashioned hardware.
“While CA is a departure from Broadcom’s core semiconductor business, it is consistent with its track record of acquiring out-of-favour, market leaders with high-cost structures,” Jefferies analysts said.
“Importantly, AVGO has consistently demonstrated its ability to drive costs down and margins of its acquisitions up, often measured in 1,000s of basis points,” they said.
Some analysts speculated that Broadcom’s ability to rein in costs would help it use CA as a platform to build a business in the software sector that simply offsets the risks of the highly-competitive semiconductor business.
“Management is showing its ambition to move beyond silicon to be that of an Infrastructure Technology company,” Morgan Stanley analysts said.