Broadcom’s stock plummeted on Thursday following news of its $18.9 billion acquisition of CA Technologies.
While investors fled, analysts familiar with the companies aren’t so sure that the deal is bad for Broadcom.
The bull case for Broadcom’s acquisition is multi-faceted: Some analysts see cross-over between the two companies’ product portfolios — particularly in mainframes, where Broadcom has a hardware footprint and CA Technologies has a software play.
Others see Broadcom as pivoting toward software in order to build out its portfolio the way a private equity firm might.
Broadcom’s surprise $18.9 billion acquisition of CA Technologies, announced Wednesday, has caused a chasm on Wall Street as investors and company analysts try to figure out whether or not the deal is a good thing.
Broadcom’s share price sunk 14% Thursday following the announcement of the deal, a sign of investors’ discomfort with the high pricetag and lack of clarity over what Broadcom, a semiconductor company, plans to do with what some see as an underperforming software company.
But not everyone is sour on the deal. While most analysts were surprised to hear of the acquisition, many think investors are missing the big idea behind Broadcom CEO Hock Tan’s seemingly spontaneous purchase.
“While we do not think that anyone would have imagined this potential combination (definitely not us!), the deal does highlight the growing strategic importance of software to ‘non-traditional’ acquirers,” Kirk Materne, an analyst with Evercore ISI, wrote Thursday.
Here’s why analysts are keen on the deal, even if investors are not.
CEO Hock Tan has a record of successful acquisitions
One explanation for why Broadcom’s stock fell so much on Thursday is that investors didn’t understand the strategy behind the acquisition. But analysts don’t necessarily see the obscurity as a bad thing.
One reason is that Tan, in his 12 years as CEO at Broadcom and its predecessor Avago, has made several acquisitions that turned out well for the company. Basically, many analysts trust Tan’s judgement.
“We think the Street is completely misunderstanding the CA Technology deal,” Harsh V. Kumar, an analyst with PiperJaffray, said in a note Thursday. “In our opinion, the CA product set is an extension into some of the Broadcom’s recent acquisitions (Brocade and LSI), ones that have worked well for the company.”
Broadcom acquired Brocade in November 2017 for $5.5 billion. It bought LSI for $6.6 billion in December 2013.
UBS analyst Timothy Arcuri was less enthusiastic …read more
Source:: Business Insider