5 Things To Know About Broadcom's 'Hail Mary' CA Acquisition

Broadcom's Big Bet On CA Technologies

Broadcom confirmed on Wednesday its intent to acquire software specialist CA Technologies in an all-cash deal valued at $18.9 billion.

The San Jose, Calif.-based chip maker will pay $44.50 per share for CA Technologies in a deal that has already been approved by the board of directors for both companies. The acquisition price represents a premium of approximately 20 percent to the close price of CA common stock as of July 11.

Following Broadcom's failed attempt this year to acquire Qualcomm for $121 billion, Zeus Kerravala, principal analyst at ZK Research, said Broadcom is striving to make some type of market splash this year to generate new revenue opportunities. But the acquisition of CA is a leap for Broadcom.

"This deal is pretty close to a Hail Mary pass," said Kerravala. "There's no really tight synergies here."

Here are five things you need to know about Broadcom's acquisition of New York-based CA Technologies.

Broadcom's Value Drops $17 Billion

Although Broadcom CEO Hock Tan said the deal is meant to help create a world leader in infrastructure technology, investors appear to disapprove of the purchase as Broadcom shares dropped 16 percent in after-hours trading Thursday night following media reports of the deal. The drop of Broadcom's stock from $243.44 per share to $208.77 per share as of Friday afternoon represents a drop in stock value of $16 billion. The company now has a market value of $90 billion.

Breaking Into The Enterprise

Kerravala said the deal shows signs that Broadcom is struggling for organic growth. However, he said conceptually the acquisition of CA could make sense. "CA is big in enterprises and enterprise data centers, and Broadcom is trying to become more of an enterprise play and establish themselves more as a mainstream data center vendor," said Kerravala. "They could use CA as a entry point."

CA generates most of its $4.04 billion in annnual revenue from mainframe software, while Broadcom manufactures chips for communications and networking equipment.

No Obvious Synergies

Raymond James analyst Chris Caso said in a report that his global investment company sees "no obvious business synergies" between Broadcom's core semiconductor and CA's software businesses. "This deal, since it is so far afield from Broadcom's core businesses, will likely cause significant confusion about the company's strategy," said Caso.

Kerravala agreed, saying there's "no really tight synergies" between the two vendor's technologies. "CA is also not really renowned for customer service, they've been trying to improve there, but I don’t see this as being a good thing for CA customers. I don't really see what Broadcom is going to bring to the table that's going to change that," he said.

CEO's POV

Broadcom CEO Hock Tan (pictured) said the acquisition represents an important building block to create one of the world's leading infrastructure 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," said Tan, in a statement. "We intend to continue to strengthen these franchises to meet the growing demand for infrastructure software solutions."

CA CEO Mike Gregoire said the deal aligns his company's software expertise with Broadcom's semiconductor leadership position. "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 organization that shares our values of innovation, collaboration and engineering excellence," Gregoire said in a statement.

Move Comes After Failed Qualcomm Bid

Its worthy to note that the CA deal comes just four months after Broadcom's bid to buy Qualcomm for a whopping $121 billion was shut down by President Donald Trump who citing national security concerns. President Trump said there is "credible evidence" that Broadcom's proposed move to exercise control of Qualcomm "might take action that threatens to impair the national security of the United States."

Broadcom did complete its acquisition of Brocade Communications for $5.9 billion in November aimed at boosting Broadcom's position in enterprise storage and networking. However, the Brocade deal took Broadcom more than a year to finish.