Broadcom, the CA of semiconductors, agrees $19bn deal for, err, CA

Deal raise questions over Broadcom's business strategy

Broadcom has given up pursuing ever-bigger deals in the semiconductor sector and turned its attention to mainframe software vendors instead, agreeing a $18.9 billion deal to buy CA Technologies. The deal was unveiled overnight.

The proposed acquisition comes just four months after Broadcom gave up its pursuit of US rival Qualcomm in a deal that could have cost as much as $160 billion. While customer feared that it could mean big price hikes, the proposed acquisition was eventually blocked by the US government on security grounds.

While observers were surprised by the change of tack, 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 - and 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.

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 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 almost 10 years of a 12 year prison sentence for an accounting scandal.