Semiconductor behemoth, Broadcom (NASDAQ:AVGO) AVGO, is reportedly in late-stage talks with software security company, Symantec (NASDAQ:SYMC) , regarding a potential deal. The news sent SYMC shares surging this morning with a more than a 14% rally in today’s shortened day of trading. Broadcom investors are not as enthusiastic about this ostensible acquisition as shares of AVGO fall close to 4%.
An Infrastructure Technology Company
This would not be the first of Broadcom’s acquisitions that seemed to fall beyond their scope. Broadcom announced it would be buying CA Technologies, an IT management software & solutions company, for $18.9 billion (23% premium), almost a year ago today.
The stock plummeted almost 20% on the news that a semiconductor company was acquiring outside of its core competencies, investors saw a lack of synergies. This ended up being a great buying opportunity with AVGO having gained more than 40% since this announcement was priced in.
Broadcom is achieving economies of scope with the CA acquisition as well as a with the potential Symantec deal. Becoming an infrastructure technology company from the pure-play semiconductor firm diversified Broadcom’s revenue drivers as well as broadened its customer based. The cyclicality in the semiconductor space can take a toll on revenue consistency and in turn, valuation metrics.
Broadcom’s move to buy a cybersecurity company isn’t as big of a shock to investors as the CA deal, with the company already having ventured outside of its perceived scope. Symantec may not have held a place in Broadcom’s portfolio 52 weeks ago, but as the company pivots into an infrastructure technology company, the acquisition makes more sense.
Symantec is one of the largest software security companies in the US but has been struggling in recent years with management turnover becoming a systemic issue. This acquisition comes at a good time for SYMC investors and could be opportune for Broadcom as long as the premium they pay isn’t overly aggressive.
SYMC has been trading at 17x P/E, which is far below the software sector average of 27x and on the lower side of Symantec’s 5-year trend.
Semiconductor Category
The M&A activity in the semiconductor space has been ramped over the last few year. The semiconductor category is slowing down with negative EPS growth expectations over the next few quarters. Companies are attempting to hedge this deceleration by acquiring economies of scale, reaching for fatter margins.
The semiconductor segment has been quite volatile over the past 52 weeks with the iShare Semiconductor ETF SOXX fluctuating up and down large double-digit percentages. SOXX is up 28% since the beginning of the year.
Economies of scope acquisitions aren’t common in this sector. Broadcom’s quest for the benefits is pioneering with the outcome remaining to be seen.
Take Away
Broadcom’s potential acquisition of Symantec could have some benefits for both sides of the equation, but it will all boil down to price. Look for AVGO to fall further once the acquisition is officially announced. This could provide potential investors with a buying opportunity as the CA Technology acquisition did.
Broadcom’s attempt to achieve economies of scope is going to be put the test if this acquisition comes to fruition.
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