Broadcom Moves Into Software With CA Deal -- WSJ

By Dana Cimilluca, Dana Mattioli and Ted Greenwald

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 12, 2018).

Broadcom Inc. agreed to buy software company CA Technologies for $18.9 billion, a surprise move that would take the chip-making giant in a new direction.

Broadcom is to pay $44.50 a share in cash for CA, formerly known as Computer Associates, Broadcom said late Wednesday. CA shares closed at $37.21 Wednesday, so the price represents a 20% premium

The takeover would be a major strategic move for Broadcom, coming months after its $117 billion-plus hostile bid for Qualcomm Inc. was blocked by President Donald Trump.

The planned deal took some industry watchers by surprise, given that it represents expansion into a whole new area for Broadcom, which has become a semiconductor powerhouse largely through acquisitions. CA, based in New York, produces software used in corporate IT infrastructure such as mainframe computers.

Broadcom shares, which were down 2.8% in regular trading Wednesday, fell another 5.2% after hours after The Wall Street Journal reported on the impending deal, and some analysts questioned its logic. The company's market value stood at $108 billion. Shares of CA, which have risen steadily in recent years, jumped 16% to $43.10 after hours.

"Software is a natural extension when you think about the ecosystem we're playing in," Broadcom finance chief Tom Krause said in an interview.

The proposed deal, he said, would help Broadcom expand in a total market for infrastructure technology that amounts to $200 billion, about triple the size of its current opportunity.

Mr. Krause said the deal wouldn't require approval in China, which has become a minefield for U.S. tech deals amid a brewing trade war, and doesn't pose antitrust issues in other countries, making "a clear path" to complete the transaction by the end of the year.

Broadcom walked away from its pursuit of Qualcomm in March after the U.S. panel that vets foreign deals said that the bid could have implications for the U.S.'s broader technological competition with China. That panel, the Committee on Foreign Investment in the U.S., or CFIUS, said it was worried that Broadcom would stymie research and development at Qualcomm given its reputation as a cost-cutting behemoth. CFIUS said such a move could weaken Qualcomm -- and thereby the U.S. -- against foreign rivals racing to develop next-generation wireless technology known as 5G, including China's Huawei Technologies Co.

Broadcom, which launched its hostile bid for Qualcomm in November in what would have been the technology industry's biggest-ever deal, was working to relocate to the U.S. from Singapore to evade the panel's review. But the presidential order effectively ended its hopes of clinching the deal.

Broadcom completed the move the next month and is now based in San Jose, Calif. That could improve its odds of avoiding a tough U.S. government review of the CA bid. Nonetheless, about 7% of CA's revenue backlog as of March 31 was with government agencies in the U.S., according to the software company's last annual report, and that could become a flashpoint for regulators.

Broadcom was known as Avago Technologies Ltd. before Avago bought Broadcom in 2016 for about $37 billion in cash and stock. Avago went public in 2009 after incorporating in Singapore, which is known for having a low corporate tax rate.

Broadcom Chief Executive Hock Tan, who took over at the company in 2006, has earned a reputation as one of the most aggressive and successful acquirers in the technology industry, even though he stumbled in his pursuit of Qualcomm. While many technology companies seek to disrupt or dominate markets by developing new products, Mr. Tan has purchased established players with leading products and defensible advantages, and shed operations he picks up that don't fit these criteria. Since taking over at Avago, he went on a $50 billion shopping spree of a dozen companies and as many divestitures.

Broadcom makes chips for Wi-Fi, Bluetooth, and GPS connectivity in smartphones, as well as components for wired networks and data storage.

The company develops software to support its chips, supplying layers of code that help engineers write programs for its products. But software sales aren't a material part of its business, according to Bernstein analyst Stacy Rasgon.

CA Technologies, on the other hand, sells tools for mainframe computers, the source of most of its revenue, and for planning, developing and managing programming projects.

"Mainframe software is sticky and profitable," Mr. Rasgon said. "But enterprise software is not something Broadcom does, so it's less clear how CA fits into their portfolio versus prior acquisitions."

Broadcom's cash flow rose by 58% in fiscal 2017, according to S&P Global Market Intelligence. The latest expected acquisition comes on the heels of a plan, announced in April, to repurchase $12 billion in shares through the end of the company's 2019 fiscal year. Broadcom has committed to returning to shareholders half of trailing 12-month free cash flow in the form of dividends, using the rest for buybacks and acquisitions.

Mr. Tan in Broadcom's most recent earnings conference call said he was still on the lookout for acquisition targets despite the buybacks. "We keep doing both," he said. The company's cash flow is "allowing us a lot more flexibility, which allows us to still look at M&A." He added: "As we see opportunities, as we still do, we will act on those."

(END) Dow Jones Newswires

July 12, 2018 02:47 ET (06:47 GMT)

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