Broadcom Deal Gets Punishing Reception -- WSJ
July 13 2018 - 3:02AM
Dow Jones News
By Ted Greenwald and Miriam Gottfried
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 13, 2018).
Broadcom Inc. shares fell nearly 14% on Thursday, showing the
challenge Chief Executive Hock Tan faces in persuading investors
that his $18.9 billion purchase of the software company CA
Technologies makes sense for the chip giant.
The deal, announced late Wednesday, was a surprise even for
observers familiar with Mr. Tan's long history of acquisitions. The
CEO built Broadcom into a chip powerhouse largely by acquiring
companies. He keeps the parts he desires, wringing efficiencies out
of the them, and sheds the rest.
Those acquisitions made Broadcom a major supplier of chips for
wired and wireless networking. Mr. Tan attempted to tighten his
grip on silicon in smartphones in his failed effort to acquire
Qualcomm Inc., which unraveled earlier this year.
Purchasing CA, which specializes in software for mainframe
computers, takes the chip empire into foreign territory, a move
that caught Wall Street off guard.
"To say the deal came out of left field is an understatement,"
Chris Caso, an analyst for Raymond James, wrote Thursday. "We see
no obvious business synergies between the businesses, aside from
both being what Broadcom is calling 'mission-critical' technology
businesses."
The deal also resulted in Broadcom losing a key voice on its
board. Silver Lake managing partner Kenneth Hao, who was integral
in Broadcom's evolution through acquisitions and who originally
recruited Mr. Tan, left the board Wednesday in order to avoid
potential conflicts of interest with other Silver Lake portfolio
companies that compete with CA, according to a regulatory filing
Thursday. The resignation was "not the result of any disagreement
between Mr. Hao and Broadcom," the filing said.
Mr. Hao had recused himself from Wednesday's board vote on the
deal as well as the preceding deliberations because of those
potential conflicts, according to people familiar with the
matter.
The share prices of acquiring companies often decline on news of
a deal, though Broadcom has suffered a particularly steep drop.
Before the stock's 14% drop to $209.98 on Thursday, it was down
about 5% for the year.
Broadcom, formerly known as Avago Technologies, argues there are
clear benefits to integrating software with chips.
"This is an extension of a strategy that's created a tremendous
amount of value for shareholders, applying it more broadly to the
infrastructure market," Broadcom finance chief Tom Krause said in
an interview Wednesday. "CA has a number of mission-critical
businesses that make a lot of sense related to the kind of
franchises in our portfolio."
Mr. Krause said Broadcom came to understand software's potential
through its $5.5 billion purchase of Brocade Communications Systems
Inc., completed late last year. Brocade makes boxes for networks,
taking Broadcom beyond its core chip businesses, and the software
that runs on those systems is key to driving sales.
Mr. Krause also said the CA deal would help Broadcom expand in a
total market for infrastructure technology that amounts to $200
billion, about triple the size of its current opportunity in that
market, and help insulate Broadcom from the cyclical nature of the
semiconductor market.
In its most recent fiscal year, CA had revenue of $4.2 billion,
compared with Broadcom's $17.6 billion in annual revenue. Broadcom
said it expects the purchase to result in double-digit annual
growth in adjusted earnings, and to drive its long-term adjusted
profit margin before interest, taxes and depreciation to above 55%
from around 48%.
Mr. Tan's most recent chip target -- Qualcomm -- slipped through
his grasp after the Trump administration said it would block the
proposed $117 billion acquisition on national-security grounds.
That deal would have given Broadcom market leadership in
smartphone-communication chips and strengthened its position in
automotive and other emerging areas. It also would have led
immediately to greater scale, diversification and adjusted
earnings, Broadcom said at the time.
The CA deal "runs completely against the investment narrative
that management has been articulating since their attempt to buy
Qualcomm," Nomura Instinet analyst Romit Shah wrote Thursday. "This
deal hurts management's credibility, in our opinion."
The plan to buy CA comes on the heels of $12 billion in share
buybacks announced in April. Mr. Tan in Broadcom's most recent
earnings conference call said he was sizing up acquisition targets
nonetheless. The company's cash flow is "allowing us a lot more
flexibility, which allows us to still look at M&A," he
said.
Write to Ted Greenwald at Ted.Greenwald@wsj.com and Miriam
Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
July 13, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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