Chipmaker Broadcom to buy software firm CA
NEW YORK Broadcom Inc announced a US$18.9 billion 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 Tans dealmaking credentials.
The CA deal, outlined in a joint statement from the companies, comes just four months after US President Donald Trump blocked Broadcoms $117 billion 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 Broadcoms expansion, as it grew from a 4 per cent share of the chip market in 2013 to a 30 per cent share this year, thanks to acquisitions spearheaded by Tan with backing from private equity firm Silver Lake.
Tans selection of CA as Broadcoms next acquisition target, however, took Wall Street by surprise, and drove Broadcom shares down 7 per cent in afterhours 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.
Broadcoms chips power smartphones, computers and networking equipment. CA, on the other hand, specialises 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 CAs recurring revenue, rather than operational synergies.
Broadcom Chief Financial Officer Tom Krause defended the deals rationale in an interview, pointing to experience the company already has beyond chips, in selling networking gear to big businesses operating data centres.
Last year, Broadcom acquired networking gear company Brocade Communications Systems for $5.5 billion. Brocades networking gear often connects to mainframes provided by International Business Machines Corp, and those are the same mainframes that much of CAs software caters to, Krause said.
What we do is buy missioncritical technology businesses, Krause said. CA is a mission-critical technology .... Weve been pretty impressed not only with (CAs) 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.
Broadcom will pay $44.50 per share in cash for CA, a 20 per cent premium to Wednesdays closing price. It will finance the deal with cash on hand and $18 billion in new debt financing. Previously, as of May 6, Broadcoms debt stood at $17.5 billion.
CAs largest shareholders, Careal Property Group AG and affiliates, which own 25 per cent of the outstanding shares of CA, have agreed to vote for the deal, according to the announcement.
Broadcoms main semiconductor business is becoming more competitive as major customers such as Apple Inc and Samsung Electronics Co Ltd look to consolidate supplier relationships and slash costs. This led to Broadcom pursuing Qualcomm, despite the latter spurning its advances.
In March, Trump signed an order to halt what would have been the biggest-ever technology deal between Broadcom and Qualcomm on concerns it would erode the US lead in mobile technology and pave the way for China to gain the upper hand.
Krause said Broadcom has a very clear roadmap to closing the CA deal by the fourth quarter. Were an American company, he said, when asked about CFIUS having a role in the deal.
CA CEO Mike Gregoire has been looking for a deal for some time. Talks last year to merge with private equity-owned peer BMC Software fell through. Bank of America and Deutsche Bank advised Broadcom, and Qatalyst Partners advised CA. REUTERS