Monday, July 16, 2018

Broadcom Set to Purchase CA Technologies for Close to $19 Billion

If you've been paying attention the past couple of days you no doubt will have heard that Broadcom, heretofore known for their semiconductors, has made a bid to acquire CA Technologies. I've been expecting something to happen ever since the rumors of a merger with BMC were rampant about a year ago.

Broadcom is offering an all cash deal for CA, but many analysts and customers of both companies are questioning the synergy of the deal.

The general thinking, at least what I have seen in the news, is that Broadcom acquiring CA is "illogical." And I can see that point-of-view. Although Broadcom and CA are both ostensibly in the technology market, CA is in the enterprise software space, a completely different part of the technology industry than the semiconductor and components space occupied by Broadcom. 

The other aspect of this acquisition focuses on CA, which has been in a bit of a slump. Its stock price has pinged between the mid-20s to the mid-30s for the past 5 years (until this acquisition was announced). And CA's product portfolio is what it is. If you have ever dealt with CA you kind of know that there is not a lot of new and innovative functionality being added to its products. (To my CA friends, yes, this is a broad generalization and I know that there have been some new things you've been adding, but CA has a reputation of being an acquirer, not an innovator.)

So, yes, this is a difficult acquisition to understand. That said, Broadcom has probably got the cash for it since its attempted acquisition of Qualcomm fell through back in March 2018 (over $100 billion). If Broadcom has a plan for taking advantage of CA’s customer base – high end enterprise accounts – and building out a core of hardware and software, the acquisition could work. The company bought Brocade last year to extend into the mobile and networking connectivity market. If Broadcom uses CA’s assets and expertise to include the mainframe as part of its connectivity business -- and moves to further embrace the cloud and IoT -- the acquisition could make sense in the long term. 

CA's mainframe products make up the bulk of their revenue consisting of $2.2bn in the 2017-2018 financial year. The remainder of its enterprise software garnered $1.75bn with $311m in services revenue. So the big nut in this acquisition is the mainframe solutions. What will Broadcom do with them? How will they fit into the overall company and strategy for Broadcom? Are there plans to spin off just the mainframe business so it can operate more nimbly? Note to Broadcom: if you plan to do this call me! You should call the spinoff Platinum Technology, inc.

But who knows? My initial reaction was “that’s strange,” but after investigating it a bit I guess I can see some rationale for this acquisition.

With all of this on the table, keep in mind that most large acquisitions fail. And the business models of the two companies are wildly different. So there is a lot for Broadcom/CA to overcome.

As an outsider, it’ll be fun to watch this unfold. 

If you are a CA customer, let us know what you think about this. Will it be good or bad for the products? And how are you and your company planning to react?