On July 11th, Broadcom Limited riled the tech industry with their surprising purchase of enterprise software company CA Inc., in a massive $19B all-cash deal. Taking many by surprise, the announcement rapidly led to negative sentiment towards Broadcom as many were quick to question the deal. Broadcom in the past has made headlines for notable acquisitions, such as their attempt at a takeover of rival Qualcomm or Brocade Communications. But no such deal has created an uproar compared to this one. Since becoming CEO of Broadcom Limited, Hock Tan has earned a reputation of being a serial acquirer, often working to rollup many small startups in an attempt seize control of a growing market. His company has purchased competitors or other companies in adjacent industries to leverage higher performance from their own line of products. However, following the announcement that Broadcom would purchase enterprise software company CA Inc., analysts and tech insiders alike are left scratching their heads asking why. To say that Tan came out of left field with this may be an understatement. He may not have been in the same ballpark.
Broadcom historically used a roll-up strategy to seize control of the fragmented semiconductor industry. Tan in his 11 years as CEO has grown the company from being a comparatively small chip manufacturer with revenue of $1.5B to a global giant with revenue of over $17B per year. With the CA acquisition, Broadcom will begin to transition into the software business – uncharted territory for the longtime electronics manufacturer. There are few direct synergies that are apparent for Broadcom in this deal, as neither company has many shared customers or suppliers. Nevertheless, business is business, and Mr. Tan has never been hesitant to speak his mind or act on what he sees as the future of the tech industry. Enterprise software provides a new market in which Broadcom may pursue additional M&A, with far less regulatory challenges that they face in the chip manufacturing industry.
The enterprise software market is largely similar to the environment that Tan has come to control in the semiconductor industry. There is an abundance of small firms in the market who provide specific services across a wide spectrum of offerings. CA’s product offerings contain dozens of various enterprise software services, ranging from managing software development through DevOps to testing application security. CA Inc., is also known to execute multiple acquisitions a year, using these purchases to broaden their product offerings. CA Inc. software fees increased by 31% in 2017, largely as a result of revenue driven by of companies such as Veracode and Rally Software, some of the more notable purchases made by CA Inc. in the last few years.
In Broadcom’s press release, Mr. Tan stated that the deal is “an important building block as we create one of the world's leading infrastructure technology companies.” This deal will certainly propel them forward in the overall Infrastructure Technology field, essentially attacking the market from both flanks. It will be important to closely follow Broadcom in the future, as any further purchase or divestures should provide greater clarity into how CA Inc. can be integrated into their current portfolio of offerings. This is Tan’s riskiest gamble to date, and yet, we do not expect the acquisition of CA too immediately, if ever, propel sales of the company’s semiconductors. Without doubt, this announcement is certainly one of the most surprising corporate mergers in recent memory.
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