Mega-chip stock Broadcom plunges 12% after Wall Street demolishes company's software acquisition strategy

Wall Street is buzzing over Broadcom’s befuddling strategy to acquire a low growth software company.

On Wednesday after the market close Broadcom announced it had entered into an agreement to acquire software company CA Technologies for $18.9 billion.

Raymond James told its clients it was surprised on the deal announcement and questioned the company’s rationale.

“To say the deal came out of left field is an understatement. We see no obvious business synergies between Broadcom’s semiconductor business and CA’s Software business,” analyst Chris Caso said in the report Wednesday. “This deal, since it is so far afield from Broadcom’s core businesses, will likely cause significant confusion about the company’s strategy.”

Broadcom shares declined 12 percent in Thursday’s premarket session. The company’s market value was $105 billion as of Wednesday’s close, according to FactSet.

One Wall Street firm said the change in strategy to buy a software company versus its historical pattern of buying semiconductor firms will hurt management’s standing with investors.

“CA is a legacy software company that specializes in mainframes – shared synergies are not obvious,” Nomura Instinet analyst Romit Shah said in a note to clients Thursday. “More important is that this deal runs completely against the investment narrative that management has been articulating … Management has stressed that Broadcom is focused on delivering shareholder value through organic growth, capital return and tuck-in acquisitions. This deal hurts management’s credibility, in our opinion.”

Shah reiterated his neutral rating and lowered his price target to $225 from $250 for Broadcom shares. The stock closed at $243.44 Wednesday.

Mizuho Securities said its clients are worried that Broadcom may not succeed in the software business given Intel’s previous trouble in the same industry.

“We are getting investor pushback with an unexpected surprise at a big software acquisition as it potentially strays from AVGO’s hardware focus with little overlap with current strategy,” analyst Vijay Rakesh said Wednesday in a note. “We believe investors are smarting from prior unsuccessful software M&A such as INTC buying McAfee and Windriver, both of which INTC recently divested to private equity.”

Rakesh reaffirmed his buy rating and $310 price target for Broadcom shares.

Broadcom did not immediately respond to a request for comment.