Broadcom buys CA Technologies as a $18.9 billion consolation prize

Broadcom announced it is going to acquire the software company CA Technologies in a $18.9 billion deal, after its proposed takeover of Qualcomm fell apart in March.

This deal gave CA Technologies a 20% premium on the closing price of the last trading day. Boards of both companies have agreed to the deal, though it still needs to gain the approval from the anti-trust authorities in the US, EU and Japan. It will also need to be voted on by all the shareholders, at least nominally.

We do not see any veto on the way from the authorities. CA’s position in the software industry is nowhere close to the criticality of Qualcomm in the chipset industry. The $4.2 billion revenues it made in 2017 would qualify it in the world’s top 20 software companies, while Qualcomm, which made $22.4 billion, was vying for the 4^th place with Broadcom and SK Hynix on the table of the world’s largest semiconductor makers (trailing Samsung, Intel, and TSM).

It also lacks the leadership in innovation as Qualcomm. We believe the main concern behind the recommendation from US Committee on Foreign Investment to the President to block the deal was that they worried Broadcom would need to cut cost after the acquisition which would jeopardise Qualcomm’s investment in key R&D activities.

This deal does come as a surprise though. Despite Broadcom’s declared mission to acquire “mission critical technology businesses”, we have difficulty in seeing significant synergy between Broadcom’s chipset design business and CA, which offers cloud-based as well as conventional enterprise-level software. The attraction may lie in the “more than 1,500 patents worldwide” that CA holds.

The all-cash acquisition will be financed by Broadcom’s cash in hand as well as $18 billion debt to be issued. This will appear a small number to compare with the $106 billion it would need to borrow had the Qualcomm deal gone through.