American chipmaker Broadcom Inc. today announced that it has agreed to buy CA Technologies for $18.9 billion. It will finance the deal with cash on hands featuring $18 billion in new, fully-committed debt financing. The alliance scheduled to complete the legal formalities of acquisition by the fourth quarter of this year.
Majorly eyeing on data center gears and processors, Broadcom’s purchase of a leading IT management software and solution provider has come as a surprise to the global trade analysts. Yet, the commendable growth of the company under the reign of Chief Executive Officer Hock Tan puts a faith in the diversified merger & acquisition arrangement.
Based in San Jose now, Broadcom’s share percentage in the chip market grew from 4 percent in 2013 to 30 percent in 2018, placing it as a leading semiconductor device provider to the wired, wireless, enterprise storage, and industrial end markets. The credit definitely goes to Tan’s exceptional deal-making skills and financial support from Silver Lake.
“This transaction represents an important building block as we create one of the world’s leading infrastructure technology companies,” Tan said in a joint press release with CA Technologies.
Broadcom- Qualcomm Fiasco
The merger and acquisition statement of Broadcom-CA Technologies comes right after the US Government rejected Broadcom’s, formerly based in Singapore, bid for purchasing another semiconductor giant, Qualcomm Inc. four months back.
The US Government verdict was based on restricting the Chinese encroachment in building an advanced wireless network and causing a national threat to the nation’s security grid. Had the deal been realized, it would have been termed one of the largest technology deals in the world.
Broadcom, afterward shifted its headquarters from Singapore to California, US. The step pitched the company outside the boundaries of the Committee on Foreign Investment in the United States (CFIUS).
Financial Composition of Broadcom-CA Deal
As per the agreement, the chipmaker will pay $44.50 per share in cash to the shareholders of the CA Technologies, which is a premium of about 20 percent to the acquired company’s closing pricing on Wednesday.
Tan informed that the deal is projected to raise Broadcom’s long-term Adjusted EBITDA margins beyond 55%. In addition, the merged company will expectedly report non-GAAP revenues of approximately $23.9 billion with non-GAAP Adjusted EBITDA of approximately $11.6 billion.
Post the announcement of a potential deal, CA Technologies shares traded 16 percent above, reaching 43.25 after-hours trading on Wednesday. While due to an acquisition of a business unrelated to semiconductor portfolio, Broadcom’s shares dropped 7 percent during the same period.
The deal is subject to customary closing conditions, comprising the approval of CA shareholders and antitrust approvals in the US, the European Union, and Japan.
CA Technologies Brings Synergy
Due to diverse portfolios of both the participating companies, it is unlikely that Broadcom will gain any operational synergy from CA Technologies, though it may earn the recurring revenues from the latter’s software business. However, Chief Financial Officer of Broadcom, Tom Krause disagrees with this analysis.
Under the strategic decision of consolidating semiconductor businesses worldwide, Broadcom bought Brocade Communications Systems for $5.5 billion last year. Krause stated that the acquired company’s networking gear largely links to mainframes supplied by IBM, and CA Technologies serves similar mainframes. He added, “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.”
With CA Technologies in the cart, Broadcom will extract 28 percent of income out of the standalone software business from zero today, reports ZDNet.
Tan stated, “CA is uniquely positioned across the growing and fragmented infrastructure software market, and its mainframe and enterprise software franchises will add to our portfolio of mission-critical technology businesses.”