Broadcom agrees surprise $18.9bn deal to acquire CA Technologies

Agreement with CA comes just four months after Broadcom abandoned pursuit of Qualcomm

Semiconductor company Broadcom has agreed a surprise $18.9 billion deal to buy software company CA Technologies.

The deal comes just four months after Broadcom formally gave up its pursuit of Qualcomm in a deal that could have cost it as much as $160 billion. The proposed acquisition was blocked by the US government on security grounds.

Broadcom's proposed acquisition of CA Technologies was announced late last night. Broadcom CEO Hock Tan justified the deal on the grounds of creating "one of the world's leading infrastructure technology companies".

He continued: "With its sizeable installed base of customers, CA is uniquely positioned across the growing and fragmented infrastructure software market, and its mainframe and enterprise software franchises will add to our portfolio of mission critical technology businesses."

However, the two companies' products couldn't be more different, with Broadcom focused on semiconductors and CA still deriving more than half its revenues from mainframe software licence sales and support - not the "growing" segment of the infrastructure market, as Tan asserts. Its sales since 2014 are essentially flat, while net income is down.

In its last financial year to the end of March 2018, it posted revenues of $4.235 billion and net income of $470 million.

The deal, though, has raised questions over Tan's strategy following a string of ever-increasing deals in the semiconductor industry that has helped to make the company one of the biggest in the sector. Questions have been raised about the cost-saving synergies that might be generated, and questioned the wisdom of paying a 20 per cent premium for an old-style software company entrenched in legacy software sales.

Broadcom chief financial officer Tom Krause suggested that Broadcom would apply "the model that's created so much value" to CA, adding: "Our model is to find value in the public markets where the existing investors don't see it. This is something that we had been thinking about for a while."

That, though, was CA's traditional approach to software M&A throughout the 1980s and 1990s - a strategy that was brought to a juddering halt by a combination of the recession of 2000, the technology shift away from mainframe computing and an accounting scandal.

That scandal saw its chief financial officer, Sanjay Kumar, end up serving 10 years in prison, only being released in January 2017.

Opinion: Birds of a feather and all that

CA's traditional business strategy hasn't been dissimilar to Broadcom's: in the past, it gained a reputation for acquiring sub-par software businesses with captive installed bases, then stripping out costs and jacking up licences and support fees.

The customers grudgingly paid up. While the strategy helped make CA a global top-10 software company, it didn't make for happy, loyal customers.

Indeed, there weren't too many tears shed after former CEO and chairman Sanjay Kumar was sent to prison for 12 years over a $2.2 billion accounting fraud that helped inflate the company's sales figures in 1999 and 2000 - years in which, entirely coincidentally, some $1.1 billion was paid out to top executives at the company in the form of bonuses.

Following the account scandal, the company had a clear out of executives and turned itself into a more ‘normal' software company.

However, without a flow of big acquisitions the company's growth also dried up, especially as CA was essentially a collection of legacy software tools in an industry that was rapidly being changed by open systems, client/server and, latterly, cloud computing.

For Broadcom, the decision to acquire CA Technologies is an odd one, and CFO Tom Krause's justification simply doesn't wash.

The bottom line is that Broadcom, like CA Technologies almost 20 years ago, has run out of targets in the semiconductor sector to keep its acquisition-fuelled growth going and has quickly turned to rummaging around in the remainder bin of the software industry instead.