Breaking News
0

Broadcom loses $19 billion in market value after bid to buy CA

Stock MarketsJul 12, 2018 02:21PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. A sign to the campus offices of chip maker Broadcom Ltd, who announced on Monday an unsolicited bid to buy peer Qualcomm Inc for $103 billion, is shown in Irvine, California 2/2

By Sonam Rai and Vibhuti Sharma

(Reuters) - Chipmaker Broadcom (NASDAQ:AVGO) Inc's surprise bid to buy software company CA Inc (NASDAQ:CA) for $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 percent to $197.50 - their worst day ever. CA rose 18.5 percent to $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 $44.50 per share in cash, months after President Donald Trump blocked its $117 billion mega-merger with Qualcomm (NASDAQ:QCOM) Inc.

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 percent from 5 percent.

"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 $63 to $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 fledgling 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 (NYSE:IBM).

But while that business generates cash flow of $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-favor, 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 (NYSE:MS) analysts said.

After the deal, the combined company would have roughly 71 percent revenue from semiconductors and 28 percent from software.

"We think many investors may not like it - at least initially - but this does open the door for a new angle to the story and further improves AVGO's capital return potential (we model $10/shr dividend in F19) in the meantime," UBS analyst Timothy Arcuri said.

To view a graphic on Broadcom deal history under CEO Hock Tan, click: https://reut.rs/2JmlC4e

This version of the story has been refiled to correct the Emulex item in the graphic.

Broadcom loses $19 billion in market value after bid to buy CA
 

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email