CA Technologies shareholders will receive $44.50 a share in the all-cash deal, an approximately 20 per cent premium to the software maker’s closing price of $37.21 a share on July 11. The transaction has already been approved by each company’s board of directors, Broadcom said on Wednesday.
The deal marks a change in direction for the chip industry’s most active acquirer, taking it into the market for infrastructure software — the code that runs at the heart of corporate IT systems. Broadcom’s shares fell 5 per cent on the news, as investors worried about its deviation into a new market after honing its dealmaking skills with a string of chip acquisitions.
The deal will bring Broadcom a software company with solid cash flow but little growth. CA has been linked to a number of potential software mergers over the years, thanks to the reliable earnings thrown off by its legacy mainframe business, coming close at one point to combining with BMC. It produced $1.2bn of operating cash flow last year on revenues of $4.2bn.
Broadcom does not plan to seek approval from the Committee on Foreign Investment in the United States (Cfius), the inter-agency government body that blocked its hostile approach for Qualcomm on national security grounds.
The company earlier this year moved its corporate headquarters from Singapore to the US. While the group was ultimately prevented from pursuing Qualcomm, its new headquarters in San Jose, California should exempt it from needing Cfius sign-off now.
Broadcom is being advised by Deutsche Bank and Bank of America Merrill Lynch, while Qatalyst Partners are working with CA Technologies.
Shares of CA surged 16 per cent in after-hours trading to $43.02 after the Wall Street Journal reported that the deal was imminent. Broadcom stock slipped 5 per cent to $231.21.
CA still gets slightly more than half of its revenue from selling software used in mainframe computers, even though the heyday of mainframes passed more than 30 years ago. The business produced an operating profit margin of 64 per cent last year, a testament to the ability of business software companies like CA to milk old technologies for many years, thanks to the sunk costs that many customers have made in their systems.
The company has been using some of the cash to build a newer enterprise software business based around planning, development and management tools. That part of its business grew 13 per cent last year, to $1.7bn, but made an operating margin of only 9 per cent.
Mr Krause said Broadcom would apply the same techniques that it had used in its earlier chip deals, using heavy borrowing to pay for the acquisition and narrowing investment on to products that have the chance to be leaders in their market. “We will tend to pick our bets,” he said, though he declined to say whether this would mean cutting back CA’s enterprise software arm. According to Broadcom, CA’s enterprise software division only has 6 per cent of the markets it is in, compared to 26 per cent for mainframe software.
Our job is to look at creating value relative to our other options. This is just applying what we know to an adjacent market
Tom Krause, chief financial officer
Hock Tan, Broadcom’s chief executive and president, has earned a strong reputation on Wall Street for squeezing more cash out of his acquisitions, often by shutting down parts of the companies he buys that are consuming cash.
Concerns that he would cut Qualcomm’s investments in newer businesses contributed to a strong backlash against his acquisition approach, though Mr Tan has insisted that he maintains investments in new markets where there is a good chance of a return.