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Why CA, Inc. Shares Jumped and Broadcom Stock Fell Today

Anders Bylund, The Motley Fool

What happened

Enterprise software specialist CA, Inc. (NASDAQ: CA) has agreed to an $18.9 billion buyout by semiconductor giant Broadcom (NASDAQ: AVGO). CA shares rose more than 18% on the news, hovering less than 2% below the agreed acquisition price of $44.50 per share. Broadcom investors went in the opposite direction, reducing share prices by as much as 18.9%. As of 1:40 p.m. EDT, Broadcom shares had recovered slightly to a 15.2% drop.

So what

The all-cash merger comes with preapproval by both boards of directors and the support of CA's largest shareholder group. Since the companies work in very loosely related fields with little direct overlap between their products and services, regulatory reviews in Europe, the U.S., and Japan should be a cakewalk.

Man painting a large wall mural, featuring one lerge yellow fish trying to eat a smaller one.

Image source: Getty Images.

Now what

CA shares nearly matched the proposed deal price right away, showing high investor confidence that the deal will be completed this calendar year, just as planned. The final price per share is a strong multiyear high, reaching all the way back to the dot-com boom and bust nearly two decades ago.

Broadcom investors are less impressed with this idea. It's a little unclear exactly how the two companies plan to make the most of their combination, beyond the simple combination of two distinct customer lists. The negative trades shaved nearly $19 billion off Broadcom's market value today, roughly in line with the size of the upcoming addition. In other words, Broadcom's shareholders see limited additional value in the planned CA acquisition.

It's up to Broadcom and CA to prove the doubters wrong. Meanwhile, Broadcom could be a reasonable investment idea for opportunistic buyers while there's no real reason to hold CA shares at this point -- there may not be any risk-based downside here, but the upside is also close to zero percent.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.