Broadcom Inc announced on Wednesday a deal of $18.9 billion to buy CA Inc. The chipmaker is looking to venture far beyond their realms of semiconductors. Broadcom’s chips power smartphones, computers and the like, whereas CA specializes in software and they had been looking to expand their business. CA Technologies CEO Mike Gregoire too has been looking for a deal for some time.
Broadcom’s main business is becoming more competitive as major customers like Apple and Samsung look to consolidate supplier relationships and slash costs. This lead to the pursuit of Qualcomm by Broadcom. Just four months back US President Donald Trump blocked Broadcom’s $117 billion bid for Qualcomm Inc stating that the company posed a security threat to the country. Since then, Broadcom has redomiciled from Singapore to the US which conveniently put them outside the purview of the Committee on Foreign Investment in the US.
The new deal looks like a financial investment on Broadcom’s part and their acquisition of CA brought Broadcom shares down by 7%. RBC Capital Markets analyst Amit Daryanani wrote, “Investors will wrestle and try to gain comfort in (the) strategic rationale and its impact to capital allocation.” Broadcom will definitely benefit primarily from CA’s recurring revenue. Last year, Broadcom acquired Brocade Communications Systems for $5.5 billion.
The mainframes provided by Brocade is more or less same as CA’s but the Chief Financial Officer of Broadcom, Tom Krause defended the deal by pointing to the experience the company already has in selling networking gear to big business operating data centers.
What we do is buy mission-critical technology businesses. 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. – Tom Krause, Chief Financial Officer Broadcom
Analyst Kinngai Chan of Summit Insights Group said, “We believe this planned acquisition definitely will create some uneasiness amongst its current investor base.”
Broadcom will pay $44.50 per share in cash for CA. As of May 6, Broadcom’s debt stood at $17.5 billion.