Broadcom’s CA Gamble: Hit or Miss?

Can a chip maker suc­cess­fully con­sum­mate an in­fra­struc­ture com­pany is a $18.9bn ques­tion

PCQuest - - CONTENTS - Ra­jneesh De | ra­jneeshd@cy­ber­me­

There are cer­tain en­ti­ties in the tech­nol­ogy world who can be best de­scribed as preda­tors or more po­litely ‘ha­bit­ual ac­quir­ers’. Or­a­cle has long been rec­og­nized as one sub­scrib­ing to this in­or­ganic growth pat­tern; to a lesser ex­tent Cisco has been an­other. The chip com­pany Broadcom is an­other prom­i­nent name in the list.

Af­ter its abortive at­tempt to ac­quire Qual­comm ear­lier in the year ( Trump ad­min­is­tra­tion stalled its hos­tile bid), this week Broadcom an­nounced its de­ci­sion to ac­quire CA tech­nolo­gies for $18.9bn in cash. While an­other ac­qui­si­tion by Broadcom is not a shock, few ex­pected the tar­get to be a 42-year- old en­ter­prise soft­ware firm. It is in­deed rea­son­able to won­der if Broadcom is putting it­self too far out­side its tra­di­tional do­main strength this time around.

Fu­ture is Pos­i­tive?

CA’s prod­uct lines in­clude sev­eral en­ter­prise soft­ware of­fer­ings that han­dle ev­ery­thing from man­ag­ing soft­ware projects to mon­i­tor­ing the per­for­mance of apps and IT hard­ware to test­ing app se­cu­rity to pro­tect­ing against unau­tho­rized data ac­cess. In fis­cal 2018 (ended in March), the com­pany posted rev­enue of $4.24 bil­lion (up 5%).

Broadcom might now look to stream­line CA’s prod­uct line by sell­ing as­sets deemed non-strate­gic. And to raise prices on CA prod­ucts that com­mand high mar­ket shares, have lim­ited com­pe­ti­tion and claim a high level of cus­tomer stick­i­ness. Some of CA’s main­frame of­fer­ings for de­vel­op­ers and IT ad­mins ap­pear to fit this de­scrip­tion.

The com­pany still gets over half its rev­enue from main­frames, and Broadcom ap­par­ently sees this as a pos­i­tive. Also seen as a pos­i­tive is the fact that CA’s soft­ware and ser­vices book­ings have an aver­age du­ra­tion of more than three years, yield­ing a large base of re­cur­ring rev­enue streams.

The CA ac­qui­si­tion could very well pay off for Broadcom if CA con­tin­ues to see a mod­est amount of pos­i­tive rev­enue growth and Broadcom’s man­age­ment ex­e­cutes well on the deal. But there is a very big ‘IF’ here con­sid­er­ing that CA’s soft­ware port­fo­lio is a very mixed bag.

Some of the mar­kets in which CA has a strong presence, such as of­fer­ings for DevOps soft­ware teams, Agile code de­vel­op­ment, iden­tity man­age­ment and priv­i­leged ac­count se­cu­rity, are see­ing healthy growth. On the other hand, main­frame soft­ware is a field that (while sta­ble) is likely to see lit­tle to no long-term growth. And var­i­ous other CA busi­nesses face stiff com­pe­ti­tion -- of­ten from cloud soft­ware up­starts such as Ser­viceNow and New Relic or they are be­ing im­pacted by the adop­tion of cloud in­fra­struc­ture ser­vices from the likes of AWS and Mi­crosoft Azure.

On the pos­i­tive side, CA does have part­ner­ships with some of Broadcom’s ma­jor en­ter­prise OEM clients, such as IBM, HPE and Cisco. And -- in what’s per­haps a sign that it is open to mak­ing ad­di­tional soft­ware deals down the line -- Broadcom claims that pair­ing its prod­ucts with CA’s will cre­ate “one of the world’s lead­ing in­fra­struc­ture tech­nol­ogy com­pa­nies.”

Thumbs Down from An­a­lysts

Ma­jor­ity of the an­a­lysts though do not share this op­ti­mism. They feel there are few or no prod­uct syn­er­gies be­tween many of CA’s of­fer­ings and Broadcom’s cur­rent prod­uct line. And in terms of sales, R&D, dis­tri­bu­tion and much else, the en­ter­prise soft­ware in­dus­try is a very dif­fer­ent an­i­mal than the chip in­dus­try, or even some of Broad com’ s en­ter­prise-fo­cused hard­ware mar­kets such as Eth­er­net adapters and stor­age switches. “This deal hurts man­age­ment’s cred­i­bil­ity,” says No­mura In­stinet an­a­lyst Romit Shah. The deal is out of char­ac­ter for Broadcom, which his­tor­i­cally has bought other chip­mak­ers. CA, on the other hand, makes soft­ware for man­ag­ing in­for­ma­tion tech­nol­ogy sys­tems. Broadcom’s move to buy CA Tech­nolo­gies comes “out of left field,” he said. “CA is a legacy soft­ware com­pany that spe­cial­izes in main­frames — shared syn­er­gies are not ob­vi­ous.” The deal also raises ques­tions about long-term growth prospects for Broadcom’s core wire­less and wired com­mu­ni­ca­tions chip busi­nesses, Shah added. B. Ri­ley FBR an­a­lyst Craig El­lis com­pared the deal to chip­maker In­tel’s pur­chase of se­cu­rity soft­ware firm McAfee. In­tel had trou­ble ra­tio­nal­iz­ing that pur­chase and ul­ti­mately sold McAfee to a pri­vate eq­uity firm. The CA pur­chase lacks strate­gic ra­tio­nale and seems more like “fi­nan­cial en­gi­neer­ing” and a pri­vate eq­uity play, says Ever­core ISI an­a­lyst C.J. Muse.”Fur­ther, in­vestors will likely be con­cerned on a ‘loss of fo­cus’ in terms of broad­en­ing ex­po­sure out­side of semi­con­duc­tors,” he said in a re­port. “We note that CA Tech­nolo­gies had been in the process of sell­ing it­self and had failed to at­tract a pri­vate eq­uity buyer,” Muse said. “With soft­ware main­frame rev­enues in de­cline and no clear syn­er­gies to Broadcom’s cur­rent rev­enue streams, we strug­gle to un­der­stand Broadcom’s in­cen­tive here.” UBS an­a­lyst Ti­mothy Ar­curi though is sym­pa­thetic and­will­ing to give Broadcom CEO Hock Tan the ben­e­fit of the doubt. He noted that Tan has a proven track record of wring­ing value out of ac­qui­si­tions. Broadcom could be­come a con­sol­ida­tor in the in­fra­struc­ture soft­ware space, Ar­curi feels. Con­sol­i­da­tion in the chip sec­tor may be near­ing an end, but con­sol­i­da­tion in the servers, stor­age and net­work­ing mar­kets is in full swing. That is par­tic­u­larly true as soft­ware takes over more of the func­tions car­ried out by the dis­crete pieces of hard­ware that take up space in the data cen­tre. Tan still has to con­vince his share­hold­ers and an­a­lysts and in the long run the in­dus­try that he can master the soft­ware mar­kets as well as he has chips.

Broadcom paired with CA wil cre­ate one of the world’s top in­fra tech com­pa­nies

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