Shares of chip giant Broadcom (AVGO) are down $37.22, or 15%, to $206.21, and fell as low as $197.46, after the company last night said it will spend $19 billion in cash to buy CA (CA), the software vendor best known for mainframe programming tools.
At the rate the price is going today, the stock is on track to close at its lowest level since Feb. 1st of last, according to Dow Jones’ data gurus. Today’s is the largest percentage decline on record for Broadcom.
CA, up $6.76, or 18%, to $43.97, is on track for its highest close since July 2000, and its biggest percentage gain since February 2008.
Despite the comments in the release defending the deal, by Broadcom Chief Executive Hock Tan and despite Tan’s longtime reputation as a maker of deals investors like, there are a lot of unhappy people covering the stock today.
In fact, Broadcom stock has gotten at least five downgrades this morning.
As I mentioned last night, the term “head scratcher” is coming up in a number of reports.
Rosenblatt’s Hans Mosesmann, re-iterating a Buy rating and a $350 price target, writes “this move is a bit of a head scratcher for us as the strategic rationale escapes us.
“Tactically, the move strikes us as a management team that has run out semiconductor ideas and is going through the motions of executing acquisitions for the sake of doing them. There are no clear synergies that CA brings with Broadcom’s semiconductor business.”
Mosesmann resigns himself to “getting more answers in the coming days.”
Stacy Rasgon of Bernstein, reiterating an Outperform rating on the shares, kicks off his note to clients with the quip “even prisoners get a phone call.”
Rasgon is “loathe to be too hasty with the stock” given that it can still offer good margins and good earnings growth, “But we cannot stress how unhappy we are with the company’s communication practices around this, which helps to blunt any positive spin one might feel like applying at the moment.”
He’s upset on behalf of investors who seem upset: “Our evening was mostly filled with confused and angry calls and emails as the company effectively just walked anyone who bought the stock over the last few months (on the back of small M&A/buyback commentary) right off the cliff.
“We are absolutely speechless that the company chose not to host a broad investor conference call; we find this decision indefensible.”
This deal was “not quite what we had in mind” as he waited for Broadcom to announce some M&A, following remarks by Broadcom’s CFO back in March to that effect.
Rasgon in fact spoke with Chief Financial Officer Tom Krause last night, he writes, who told him there are “parallels from their prior entries into new industries,” and there is an intention to “get much bigger in the infrastructure software space.”
Romit Shah of Instinet, reiterating a Neutral rating, writes that “to say this came out of left field would be an understatement,” and he raises the question “Do we still trust Hock?“
“Overall, we recognize that Hock Tan has an impeccable track record, but we expect the market to be skeptical of this transaction resulting in multiple compression for the remainder of 2018.”
And Shah wonders if Broadcom now needs a more modest multiple like that of IBM (IBM).
“To us, this seems as if AVGO has now become more like an IBM as compared to an Intel or Qualcomm. We point out the valuation implications as IBM trades at approx. 10.3x FY2 P/E vs. a 15.8x average for INTC, QCOM, and TXN (i.e. large-cap semis).”
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