(Reuters) – Broadcom Inc. announced an agreement of $ 18.9 billion to buy US CA Cas Inc. on Wednesday, venturing far from its semiconductor kingdom and testing investors' confidence in Hock Tans transfer data.
The CA agreement, as outlined in a joint statement from the companies, comes only four Months after US President Donald Trump blocked Broadcom's hostile bid of $ 117 billion for Qualcomm Inc, claiming that it posed a threat to the US security level and gave rise to Chinese companies wanting to build next-generation wireless networks.
Since then, Broadcom has redomiciled from Singapore to the United States and formally ruled it outside the United States Committee on Foreign Investment (CFIUS), the Government Review Panel addresses potential national security risks.
Dealmaking has been the key to Broadcom's expansion, as it grew from a 4 percent share of the chip market in 2013 to a 30 percent share this year thanks to the acquisition of Tan, supported by Private Equity Company Silver Lake.
However, the choice of CA as Broadcom's next acquisition target surprised Wall Street and drove Broadcom shares 7 percent in after-trade. Investors and analysts encrypted to identify potential synergies, as the deal looked more like a financial investment rather than a combination of complementary companies.
"Investors will struggle and get comfort in the strategic motivation and its impact on the capital allocation," analyst Amit Daryanani analyst RBC Capital Market analyzed in a note to customers and added that "much explanation is needed."
Broadcoms chip power smartphones, computers and network equipment. However, CA is specialized in software for so-called mainframes, major servers that companies gradually replace with cloud computing and have been trying to expand into business software.
The different corners of the technology market that the two companies occupy mean that Broadcom will primarily benefit from CA's recurring revenue, rather than operational synergies.
Broadcom Finance Director Tom Krause defended business motivation motivation in an interview and pointed out that the company experienced that there are already more than chips to sell network equipment to large companies that run data centers.
Last year, Broadcom acquired network companies Brocade Communications Systems for $ 5.5 billion. Brocad's network equipment is often linked to mainframes from International Business Machines Corp., and they are the same main frameworks as many of CA's software cater, "said Krause.
"What we do is to buy mission-critical technology companies," Krause said. "CA is a mission-critical technology… We have been quite impressed not only with (CA's) management, but also the team that CA has built around these core franchises that we value."
Analyst Kinngai Chan from Summit Insights Group said it was unclear how Tan would apply its typical integration model to CA, which has worked to switch to the subscription billing model that has become common in that industry.
"We believe that this planned acquisition will definitely create some concern among the current investor base," said Chan on Broadcom.
Broadcom pays $ 44.50 per share in cash for CA, a premium on 20 percent to Wednesday's closing price. It will fund the deal with cash at hand and $ 18 billion in new debt financing. Previously, Broadcom's debt was May 6th, $ 17.5 billion.
CA's largest shareholder, Careal Property Group AG and subsidiaries, which own 25 percent of the outstanding shares in CA, have agreed to vote for the deal, according to the announcement.
Broadcom's main semiconductor business is becoming more competitive as major customers like Apple Inc. and Samsung Electronics Co. Ltd aim to consolidate supplier relations and slash costs. This led to Broadcom following Qualcomm, although the latter asked its progress.
In March t Trump received an order to stop what would have been the biggest technological agreement between Broadcom and Qualcomm for concern that it would wipe out the United States leadership in mobile technology and pave the way for China to get the top edge.
Krause said that Broadcom has "a very clear roadmap" to close the CA agreement in the fourth quarter. "We are a US company," he said when asked if CFIUS had a role in the deal.
CEO Mike Gregoire has been looking for a deal for a while. Conversation last year to merge with private shareholders BMC Software fell through.
Bank of America and Deutsche Bank advised Broadcom, and Qatalyst Partners advised CA.
Reporting by Greg Roumeliotis in New York, Stephen Nellis of San Francisco and Arjun Panchadar in Bangalore; Editing Lisa Shumaker and Cynthia Osterman