Broadcom's Purchase of CA Is One 'Hock' of a Strange DealBroadcom's Purchase of CA Is One 'Hock' of a Strange Deal
In my time as an analyst, I have seen some strange acquisitions… but this is the Michael Jordan of weird deals.
July 12, 2018
This week chip vendor Broadcom surprised the industry when it announced its intent to acquire enterprise software vendor CA Technologies for $18.9 billion, a purchase price representing about a 20% premium over CA's current stock price. Over the past several years, Broadcom's business and stock price has seen steady growth, as it has purchased rival companies such as Brocade, NetLogic Microsystems, and Silicon Spice.
On the surface, the acquisition of CA is certainly as strange as Arianna Grande dating Pete Davidson -- meaning there's nothing in common between the two. Broadcom makes silicon and has never had any desire to extend into other direct-to-end user markets. Its recent acquisition of Brocade is a good indicator of this. The company purchased Brocade, kept the storage business, which is primarily sold through OEM channels, and then practically gave the Ethernet switch business to Extreme Networks. CA is a pure software company that sells infrastructure management. Half of its current revenue comes from mainframe management, a business that has very little growth opportunity but isn't likely to decline either.
On a conference call with investors, Hock Tan, Broadcom CEO and president, justified the purchase by describing CA as a leading infrastructure technology company. Given its position as the market leader in managing mainframes and other legacy equipment, this could be one description. The other way to look at CA is as a tired software company that is in dire need of a refreshed portfolio. Apparently, this did nothing to convince investors, as Broadcom stock got hit hard, getting cut by about 15%. The Street's founder, Jim Cramer, called the purchase "the antithesis of a semiconductor deal," and noted that if the company was going to make a move into software it should have looked at something like VMware.
The inability of CA, BMC, and the other legacy management vendors to meet the needs of businesses that are becoming increasingly dynamic and distributed is why there are so many infrastructure management startups. For example, CA is an OK application performance management vendor, but AppDynamics (now owned by Cisco), Dynatrace, and New Relic are better. The access management market is filled with small vendors such as Okta, Centrify, and OneLogin. The network management space is filled with startups like LiveAction, ExtraHop, and Nyansa, as well as established suppliers like NetScout and Riverbed.
Examining the Possibilities
So, what's Broadcom's strategic rationale for buying CA? Only time will tell, but clearly the move into software is a new direction for the company whose $110 billion takeover bid of chip maker Qualcomm was squashed by President Trump earlier this year because of national security concerns. There is only so much silicon to buy, and my assumption is that Hock had to look at other markets for growth. Given CA's massive install base and broad product portfolio, one could argue that it's undervalued and with the right management, the company can be turned around and become a leader in many of the emerging management markets such as multi-cloud, containers, and DevOps.
Another possibility for Broadcom is that it uses the CA installed base to build stronger relationships with large enterprises to drive its core business. This seems unlikely though, as there really isn't any synergy between CA and Broadcom. Products, buyers, and channel are all completely different, so there's no 1+1 = 3 here for the two companies.
The most likely scenario is that Broadcom uses this to buy other tired enterprise infrastructure vendors with bloated cost structures and acts much like a private equity firm. With CA, while the mainframe business isn't growing, it isn't going away anytime soon and can be milked for a long time.
In this case Broadcom can cut, slash, and burn any business that isn't profitable and squeeze as much money as it can out of the company for as long as it can. It's unclear what the exit strategy would be here as the market for mainframe management vendors is obviously limited but it can make a lot of money from that business in the near to mid-term. If Broadcom were looking to complement CA, BMC would make a nice addition. BMC's current CEO is Peter Leav, who is popular in this industry from the work he did at Polycom putting the company in a position to be taken over by a private equity firm.
In my time as an analyst, I have seen some strange acquisitions... but this is the Michael Jordan of weird deals. Hock can try and paint this any way he wants, but the two product lines are so distant that there are no commercial synergies. We might be seeing the start of Broadcom the private equity firm, but that's certainly nothing for investors or customers to get excited about.
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