For analysts who love Broadcom Inc., Chief Executive Officer Hock Tan’s plan to acquire software maker CA Technologies isn’t resonating well with Wall Street. Broadcom’s shares plunged for a record intraday loss, as analysts appear confused as to how the deal fits within the existing business.
The $18.9 billion all-cash acquisition has resulted in several downgrades for the semiconductor company, with Evercore noting the “loss of focus” as a big worry for investors. But Tan maintains some support on Wall Street, as Suntrust writes that this isn’t Broadcom’s first “weird” acquisition, adding that the market reaction is seemingly overdone.
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Broadcom sank as much as 19 percent at 9:45 a.m. in New York for its worst intraday loss since 2009, while CA shares climbed 18 percent to their highest level since 2000.
Here’s what analysts have to say:
B Riley FBR, Craig Ellis
(Neutral from buy, drops $308 price target to $245)
Ellis is moving to the sidelines as the CA Technologies deal "entails a significant strategic shift, moving into a complex and competitive area where comms-centric semiconductor core competencies may be of little value."
Though Broadcom’s deal-integration is strong, new and unique challenges are likely and this acquisition risks ongoing operational uncertainty.
Good news is Ellis believes "handsome accretion is possible, given CA’s sturdy profile."
Evercore, C.J. Muse
( Cuts stock to in-line from buy, lowers PT $275 from $300)
With software revenues in decline, there are no clear synergies to Broadcom’s current revenue streams, and the firm is struggling to understand management’s motivation for the deal.
Investors may also be worried by a “loss of focus” as far as moving exposure outside of semiconductors.
Macquarie, Srini Pajjuri
(Neutral from outperform, $250 price target from $315)
“Uncharted waters!” Pajjuri writes in a note.
“While we expected the company’s M&A activity to continue, we did not anticipate a deal of this magnitude, in a market that’s so far outside the core business, this soon” after the failed Qualcomm bid.
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Pajjuri believes that management’s commentary suggests “the company may be looking to consolidate the fragmented infrastructure software industry, which means more deals are likely.”
SunTrust, William Stein
(Buy, $339 price target)
Stein came to defense of the semiconductor company. “While we understand ‘haters gonna hate’ as the software acquisition fit looks questionable, we note that ‘players gonna play’”.
The acquisition isn’t Broadcom’s first “weird deal,” and the stock’s reaction looks to be overdone.
Believes Broadcom “is a serial acquirer,” and its deals don’t always look like a great fit to outsiders, but the company has a strong history of deals.
Bernstein, Stacy Rasgon
(Outperform; $320 price target)
“Since Qualcomm slipped through Broadcom’s fingers, we have been waiting for them to announce a new smaller deal. However, this one is not quite what we had in mind.”
“On a purely financial stand-alone basis, we could argue that CA has the typical characteristics of a franchise” as Broadcom defines it.
Rasgon believes the deal appears “decently accretive” with the target having “an extremely profitable, sticky mainframe business coexisting with an enterprise segment that appears ripe for rationalization.”
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