Chip giant Broadcom (AVGO) this evening announced it intends to buy venerable software vendor CA (CA) for $18 billion, or $44.50 per CA share in cash, confirming confirming a report by the WSJ this afternoon.
This deal is a bit of a head scratcher, and it’s not clear the statement by Broadcom CEO Hock Tan really clarifies matters.
This transaction represents an important building block as we create one of the world’s leading infrastructure technology companies. 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. We intend to continue to strengthen these franchises to meet the growing demand for infrastructure software solutions.
Broadcom further added that the deal “builds One of the World’s Leading Infrastructure Technology Companies” and in so doing, “continues Broadcom’s Focus on Acquiring Established Mission Critical Technology Businesses.”
The deal will “expand Broadcom’s TAM to Include Growing and Fragmented Infrastructure Software Market.”
Wall Street will have lots of questions about that.
Amit Daryanani with RBC Capital, who has a “Top Pick” rating on Broadcom, writing before the release came out, states in a note to clients that that there’s “lots of explanation needed.”
“While we understand the logic behind the attractive free cash flow stream at CA, investors will wrestle and try to gain comfort in strategic rationale and its impact to capital allocation.”
Among things investors will ask, “Why is AVGO moving into software space and how does this deal mesh with their core operations?”
Of immediate concern, he writes, Broadcom has pledged itself to returning half its annual cash flow to investors through dividends. “Will that still hold up?” He asks.
Regulatory approval is a concern given issues lately with approval of deals by China, such as Qualcomm’s (QCOM) deal to buy NXP Semiconductor (NXPI), which has been waiting on China approval for a long time now.
And, “While we don’t think is the issue, investors will be concerned if this signals headwinds in the core AVGO business that is driving further M&A?”
And then, “How broad will AVGO’s M&A go if the decision is to go beyond semiconductors?”