NEW YORK • Broadcom announced an US$18.9 billion (S$25.7 billion) deal to buy US business software company CA on Wednesday, venturing far beyond its realm of semiconductors and testing investors' confidence in its chief executive Tan Hock Eng's dealmaking credentials.
The CA deal, outlined in a joint statement from the companies, comes just four months after United States President Donald Trump blocked Broadcom's US$117 billion hostile bid for semiconductor peer Qualcomm, arguing that it posed a threat to US national security and gave an edge to Chinese firms looking to build next-generation wireless networks.
Since then, Broadcom has redomiciled from Singapore to the US, placing it formally outside the purview of the Committee on Foreign Investment in the United States (CFIUS), the government panel that reviews deals for potential national security risks.
Dealmaking has been key to Broadcom's expansion, as it grew from a 4 per cent share of the chip market in 2013 to a 30 per cent share this year, thanks to acquisitions spearheaded by Mr Tan with backing from private equity firm Silver Lake.
Mr Tan's selection of CA as Broadcom's next acquisition target, however, took Wall Street by surprise, and drove Broadcom shares down 7 per cent in after-hours trading on Wednesday. Investors and analysts scrambled to identify potential synergies, as the deal looked more like a financial investment rather than a combination of complementary businesses.
"Investors will wrestle and try to gain comfort in (the) strategic rationale and its impact to capital allocation," RBC Capital Markets analyst Amit Daryanani wrote in a note to clients, adding that "lots of explanation (would be) needed".
Broadcom's chips power smartphones, computers and networking equipment. CA, on the other hand, specialises in software for so-called mainframes, big servers that companies are gradually replacing with cloud computing, and has been seeking to expand in business software.
The disparate corners of the technology market the two companies occupy mean that Broadcom will benefit primarily from CA's recurring revenue, rather than operational synergies.
Broadcom chief financial officer Tom Krause defended the deal's rationale in an interview, pointing to experience the company already has beyond chips, in selling networking gear to big businesses operating data centres.
Last year, Broadcom acquired networking gear company Brocade Communications Systems for US$5.5 billion. Brocade's networking gear often connects to mainframes provided by International Business Machines Corp, and those are the same mainframes that much of CA's software caters to, Mr Krause said.
"What we do is buy mission-critical technology businesses," Mr Krause said. "CA is a mission-critical technology... We've been pretty impressed not only with (CA's) management, but also the team that CA has built around these core franchises that we value."
Analyst Chan Kinngai of Summit Insights Group said it was unclear how Mr Tan would apply his typical integration model to CA, which has been working to shift to the subscription billing financial model that has become common in that industry. "We believe this planned acquisition definitely will create some uneasiness among its current investor base," Mr Chan said of Broadcom.
Broadcom will pay US$44.50 per share in cash for CA, a 20 per cent premium to Wednesday's closing price. It will finance the deal with cash on hand and US$18 billion in new debt financing. Previously, as of May 6, Broadcom's debt stood at US$17.5 billion.
CA's largest shareholders, Careal Property Group and affiliates, which own 25 per cent of the outstanding shares of CA, have agreed to vote for the deal, according to the announcement.
Mr Krause said Broadcom has "a very clear road map" to closing the CA deal by the fourth quarter. "We're an American company," he said, when asked about CFIUS having a role in the deal.