Broadcom to Acquire CA: Tech ETFs in Focus

Communications’ chipmaker Broadcom AVGO surprised Wall Street by announcing that it is acquiring the software provider CA Inc. CA) for $19 billion in cash.

Under the terms of the deal, Broadcom would be paying $44.50 per share in cash to CA's shareholders. This represents a 20% premium to CA's closing price as of Jul 11. The transaction, which is expected to close in the fourth quarter, was approved by the boards of both companies. The deal came a few months after Donald Trump blocked Broadcom's $117 billion hostile bid for semiconductor peer Qualcomm QCOM, citing national security threats  (see: all the Technology ETFs here).

The chip-making giant aimed at diversifying the company’s business beyond semiconductors by acquiring CA, which is a legacy software company specializing in mainframes. Per AVGO CEO Hock Tan, “the transaction represents an important building block as we create one of the world’s leading infrastructure technology companies. We intend to continue to strengthen these franchises to meet the growing demand for infrastructure software solutions.”

The deal is expected to drive Broadcom's long-term adjusted EBITDA margins above 55% and be immediately accretive to its non-GAAP EPS. If approved, the transaction would reshape Broadcom’s pure software business and provide a new arena into the software market.

Market Impact

The news led to negative sentiment for Broadcom, pushing its shares down as much as 19% on the day - its biggest drop ever. Broadcom received a series of downgrades and price-target cuts, following the acquisition announcement. At least five Wall Street firms downgraded their ratings on Broadcom stock and four others cut their price targets, as they are concerned about the company’s strategy to acquire a low-growth software company. On the other hand, CA shares jumped 18.7%.

The announced acquisition has put the spotlight on a few technology ETFs focusing on either semiconductor or software. Below we have highlighted these in detail. All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting their continued outperformance:

iShares PHLX Semiconductor ETF SOXX

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 firms. Of these, AVGO takes the fourth position in the basket with 7.9% share. The fund has amassed $1.6 billion in its asset base and trades in solid average volume of around 697,000 shares a day. It charges 48 bps in fees a year from investors and gained 0.7% on the day. SOXX has a Zacks ETF Rank #1.

VanEck Vectors Semiconductor ETF SMH

This fund provides exposure to 26 securities by tracking the MVIS US Listed Semiconductor 25 Index. Broadcom takes the seventh spot with 5.01% of assets. The product has managed assets worth $1.4 billion and charges 35 bps in annual fees and expenses. It is heavily traded with a volume of around 6.1 million shares per day and has gained 1.2% on the day. The product has a Zacks ETF Rank #2 (read: 5 Small-Cap Tech Stocks to Keep Trade Tensions At Bay).

SPDR S&P Semiconductor ETF XSD

This fund tracks the S&P Semiconductor Select Industry Index, a modified equal-weighted index. It holds 34 stocks in its portfolio with AVGO accounting for nearly 3.1% share. The ETF is less popular and illiquid with AUM of $316.9 million and average daily volume of 140,000 shares. It charges 35 bps in fees per year and was up 1.4% on the day. The product has a Zacks ETF Rank #1.

Invesco Dynamic Networking ETF PXQ

This fund follows the Dynamic Networking Intellidex Index, holding 30 securities in its basket. Out of these, CA accounts for 2.7% share. The fund is relatively unpopular and illiquid in the broad tech space with AUM of $65.4 million and average daily volume of about 9,000 shares. It charges 63 bps in annual fees and has a Zacks ETF Rank #1. PXQ gained 1.2% on the day on the acquisition news (read: 3 Tech ETFs Upgraded to Top Rank Amid Trade Fears).

iShares North American Tech-Software ETF IGV

This ETF provides exposure to the software segment of the broader U.S. technology space by tracking the S&P North American Technology-Software Index. Holding a basket of 64 securities, CA makes up for 1.3% in the portfolio. The fund charges 48 bps in annual fees and has AUM of $2 billion. Volume is good as it exchanges nearly 238,000 shares a day. IGV has a Zacks ETF Rank #2.

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QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
 
Broadcom Limited (AVGO) : Free Stock Analysis Report
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
VANECK-SEMICON (SMH): ETF Research Reports
 
SPDR-SP SEMICON (XSD): ETF Research Reports
 
ISHARS-NA TEC-S (IGV): ETF Research Reports
 
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