Earlier the Trump Administration had blocked Broadcom’s $117 billion hostile bid to acquire Qualcomm Inc citing national security concerns. But since then in a cunning move, Broadcom has re-domiciled from Singapore to the U.S, which places it outside of CFIUS’ review.
In a development that marks Broadcom Inc expanding its footprint in areas beyond its traditional sector of semiconductors, the chipmaker stated it intends to acquire U.S. business firm CA Inc for $18.9 billion.
The deal, outlined in a joint statement by both companies, comes in the wake of U.S. President Donald Trump blocking Broadcom’s $117 billion bid Qualcomm Inc citing national security concerns.
Since then, in a strategic move, Broadcom has re-domiciled from Singapore to the U.S, thus placing it outside the purview of the Committee on Foreign Investment in the United States (CFIUS). When asked on CFIUS having a role in the deal, Broadcom’s CFO Tom Krause said, “We’re an American company”.
Dealmaking has been a key strategy in Broadcom’s expansion plan. This year, its marketshare in the chip industry grew to 30% from 4%, thanks to acquisitions made with the backing of private equity firm Silver Lake Partners.
However, Tan’s selection of CA as Broadcom’s next acquisition target took investors by surprise with analysts and investors scrambling to identify potential synergies.
Broadcom’s shares were down by 7% in after-hours trading.
The deal appears to be more of a financial investment rather than a combination of complementary businesses.
“Investors will wrestle and try to gain comfort in (the) strategic rationale and its impact to capital allocation,” wrote Amit Daryanani, an analyst at RBC Capital Markets, in a note to clients, while noting that “lots of explanation (is) needed.”
The disparity in the markets of the two companies mean that rather than operational synergies, Broadcom is likely to benefit from CA’s recurring revenues.
Defending the rationale of the deal, Broadcom’s Chief Financial Officer (CFO) Tom Krause pointed out Broadcom has experience in areas that are beyond just chip making, which includes selling networking gear to big businesses which operate data centers.
In 2017, Broadcom acquired Brocade Communications Systems, a networking gear company, for $5.5 billion.
“What we do is buy mission-critical technology businesses,” said Krause. “CA is a mission-critical technology. … 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.”
“We believe this planned acquisition definitely will create some uneasiness amongst its current investor base,” said Kinngai Chan, an analyst at Summit Insights Group regarding Broadcom’s CA deal.
While Qatalyst Partners advised CA, Deutsche Bank and Bank of America advised Broadcom.