Broadcom Shares Plummet After Wall Street Questions Sudden Acquisition Strategy

Broadcom Inc AVGO moved 15 percent lower Thursday on mixed reactions following the announcement it had reached a deal to acquire CA, Inc. CA.

CA Inc. (also known as CA Technologies) jumped 18 percent higher, realizing most of the 20 percent premium to the July 11 closing price that Broadcom agreed to pay.

“What the Hock?” said Evercore analyst C.J. Muse, referring to Broadcom CEO Hock Tan.

What Happened

Broadcom and CA Technologies on Wednesday announced Broadcom agreed to acquire the enterprise software company for $18.9 billion, funded by cash on hand and $18 billion in new debt financing.

CA Technologies manufactures cloud-based and traditional enterprise software. Over the past 12 months it was generated $4.2 billion in revenue.

The news comes just months after the Trump administration blocked Broadcom’s hostile takeover bid for Qualcomm, Inc. QCOM. The deal was deemed to have implications for the United States’ technological competition with China, despite Broadcom being a Singapore-based company.

Wall Street was quick to comment on the deal, which represents a break from Broadcom’s history of pursuing other semiconductor companies. For the most part, analysts appear skeptical, shaking investor confidence primarily for the near-term.

Why It’s Important

The acquisition marks a strategic win for Broadcom following its failure to acquire Qualcomm. Depending on how the Trump administration responds, if at all, it could help analysts pinpoint the scope of its concerns about Chinese M&A.

Canaccord Genuity’s T. Michael Walkley said the deal should drive accretion and help Broadcom along to its double-digit EPS growth target. Walkley maintained a Buy rating and $335 price target “despite the unexpected acquisition into a new software market.”

Other analysts were concerned by the lack of apparent synergies and shift in Broadcom’s strategy. Management had previously promised to only do incremental bolt-on acquisitions and focus on returning more cash to shareholders.

“While [Broadcom’s] execution history on M&A could be viewed as a strong indicator of management’s ability to integrate acquisitions and meet longer-term financial targets, we are struggling to understand the rationale behind adding a low growth software asset to the company’s strong portfolio of semiconductor technologies,” said MKM Partners analyst Ruben Roy in a note, who maintained his Buy rating and $300 price target.

Evercore’ C.J. Muse was also concerned that CA Technologies had previously been trying to sell itself and failed to lure a private equity buyer. Muse downgraded Broadcom shares from Outperform to In Line and cut his price target to $275.

What’s Next

The deal “will likely reset credibility with income-oriented investors (AGAIN),” Muse said in a note. “We think investors will likely be disappointed at this deal, which seems more financial engineering/PE driven than due to any strategic rationale.”

B Riley FBR’s Craig Ellis sees the deal hanging over shares for multiple quarters to come.  Ellis downgraded Broadcom from Buy to Neutral and slashed his price target from $308 to $245.

Jefferies also doubts Broadcom’s multiple will materially expand until the deal closes. Analyst Mark Lipacis maintained his Buy rating on the stock, but cut his price target from $326 to $278.

The boards of both companies have already approved the deal, but antitrust approvals from the U.S., Europe and Japan are still needed.

At time of publication, Broadcom was trading around $207.81 per share.

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Image credit: Floirian Knodt, Flickr