Broadcom has announced it will buy CA Technologies for $18.9bn, the chipmaker’s first major takeover since it was blocked by US President Donald Trump from pursuing a bid for rival Qualcomm earlier this year.
CA Technologies shareholders will receive $44.50 a share in the all-cash deal, an approximately 20 per cent premium to the software maker’s closing price of $37.21 a share on July 11. The transaction has already been approved by each companies’ board of directors, Broadcom said on Wednesday.
Hock Tan, Broadcom’s chief executive and president, said: “This transaction represents an important building block as we create one of the world’s leading infrastructure technology companies. With its sizeable installed base of customers, CA is uniquely positioned across the growing and fragmented infrastructure software market, and its mainframe and enterprise software franchises will add to our portfolio of mission critical technology businesses.”
Buying CA will bring Broadcom a software company with solid cash flow but little growth. The company has been linked to a number of potential software mergers over the years, thanks to the reliable earnings thrown off by its legacy mainframe business, coming close at one point to combining with BMC. It produced $1.2bn of operating cash flow last year on revenues of $4.2bn.
Broadcom does not plan to seek approval from the Committee on Foreign Investment in the United States (Cfius), the inter-agency government that blocked its hostile approach for Qualcomm on national security grounds.
The company earlier this year moved its corporate headquarters from Singapore to the US.
While the group was ultimately prevented from pursuing Qualcomm, its new headquarters in San Jose, California should exempt it from needing Cfius sign-off now.
Broadcom is being advised by Deutsche Bank and Bank of America Merrill Lynch, while Qatalyst Partners are working with CA Technologies.
Shares of CA surged 16 per cent in after-hours trading to $43.02 after the Wall Street Journal reported that the deal was imminent. Broadcom stock slipped 5 per cent to $231.21.
CA chief executive Mike Gregoire said in a statement on Wednesday: ““This combination aligns our expertise in software with Broadcom’s leadership in the semiconductor industry. The benefits of this agreement extend to our shareholders who will receive a significant and immediate premium for their shares, as well as our employees who will join an organisation that shares our values of innovation, collaboration and engineering excellence.”
CA still gets slightly more than half of its revenue from selling software used in mainframe computers, even though the heyday of mainframes passed more than 30 years ago. The business produced an operating profit margin of 64 per cent last year, a testament to the ability of business software companies like CA to milk old technologies for many years, thanks to the sunk costs that many customers have made in their systems.
The company has been using some of the cash to build a newer software business based around planning, development and management tools. That part of its business grew 13 per cent last year, to $1.7bn, but made an operating margin of only 9 per cent.
The lack of a clear strategic link between CA’s software tools and Broadcom’s range of chips prompted speculation that the acquisition is being driven by financial considerations rather than industrial logic.
Mr Tan of Broadcom has earned a strong reputation on Wall Street for squeezing more cash out of his acquisitions, often by shutting down parts of the companies he buys that are consuming cash.
Concerns that he would cut Qualcomm’s investments in newer businesses contributed to a strong backlash against his acquisition approach, though Mr Tan has insisted that he maintains investments in new markets where there is a good chance of a return.
CA was at the centre of a major accounting fraud more than a decade ago when Sanjay Kumar, then chief executive officer, pled guilty to charges of obstruction of justice and securities fraud. He was sentenced to 12 years in prison in 2006, eventually being released last year.