Broadcom loses $19 billion in market value after bid to buy CA

Chipmaker Broadcom Inc`s https://reut.rs/2LctJC8)

"What the Hock?" analysts from brokerage Evercore wrote 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."

Broadcom`s famously ambitious chief executive has built the company from a fledgling chipmaker to a global powerhouse through a series of big deals, and is widely respected by Wall Street for his business acumen.

"A new and unexpected infrastructure software initiative seems likely to create a multi-quarter share overhang," wrote analyst Craig Ellis from B Riley.

Susquehanna analyst Christopher Rolland said the foray into the software industry may have been driven by a lack of viable options in the semiconductor industry and increased regulatory scrutiny.

CA`s main business is selling software for big, mainframe computers, in which it is second only to IBM .

But while that business generates cash flow of $10 billion a year, its revenue growth has been flat as more customers choose cloud services over old-fashioned hardware.

"While CA is a departure from Broadcom`s core semiconductor business, it is consistent with its track record of acquiring out-of-favor, market leaders with high cost structures," Jefferies analysts said.

"Importantly, AVGO has consistently demonstrated its ability to drive costs down and margins of its acquisitions up, often measured in 1,000s of basis points," they said.

Some analysts speculated that Broadcom`s ability to rein in costs would help it use CA as a platform to build a business in the software sector that simply offsets the risks of the highly-competitive semiconductor business.

"Management is showing its ambition to move beyond silicon to be that of an Infrastructure Technology company," Morgan Stanley analysts said.

After the deal, the combined company would have roughly 71 percent revenue from semiconductors and 28 percent from software.

"We think many investors may not like it - at least initially - but this does open the door for a new angle to the story and further improves AVGO`s capital return potential (we model $10/shr dividend in F19) in the meantime," UBS analyst Timothy Arcuri said.

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