Broadcom Sinks, CA Soars on $18.9B Deal

Investors are not impressed with Broadcom Inc.’s (AVGO) decision to pay $18.9 billion in cash for software maker CA Technologies (CA).

Broadcom announced that it will pay $44.50 per share, a 20 percent premium to CA’s closing price on Wednesday. In a press release, the San Jose, California-based chip maker sought to justify its decision to buy a company that specializes in software used to manage business planning and other processes, adding that its move into corporate software will bring “significant recurring revenue” and turn Broadcom into “one of the world’s leading infrastructure technology companies.”

"This transaction represents an important building block as we create one of the world’s leading infrastructure technology companies,” said CEO Hock Tan. “We intend to continue to strengthen these franchises to meet the growing demand for infrastructure software solutions."

The deal, the latest in a string of big acquisitions under Tan’s stewardship, came after Broadcom’s $117 billion bid for Qualcomm Inc. (QCOM) was blocked by President Donald Trump’s administration in March on national security grounds. In the statement, Broadcom hinted that it plans to follow up on the CA acquisition by purchasing other companies that operate in the corporate software space. (See also: Why Did Trump Block Broadcom's Bid for Qualcomm?)

British technology website The Register, which called the acquisition "odd," pointed out that CA and Broadcom have very little in common and the former will probably form the basis of a new business unit.

Broadcom’s diversification strategy was not very well received by investors. The company’s shares fell 6.67% in pre-market trading. CA Technologies shares, on the other hand, rose 15.29% after Wednesday’s close.

Wall Street Wants Answers

When the Qualcomm acquisition was blocked, Broadcom said it would probably avoid large purchases and instead focus on returning cash to shareholders. Judging by the reaction to the CA deal, investors are now concerned that this promise has been broken.

RBC Capital analyst Amit Daryanani wrote in a research note, reported on by Barron’s, that there’s “lots of explanation needed.” “While we understand the logic behind the attractive free cash flow stream at CA, investors will wrestle and try to gain comfort in strategic rationale and its impact to capital allocation,” he said.

Daryanani, who has a “Top Pick” rating on Broadcom, added that it is no longer clear whether the chip maker can make good on its pledge to return half its annual cash flow to investors through dividends. He also voiced his concern about Broadcom’s diversification strategy, questioning how a move into the software space will "mesh" with the company’s core operations.

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