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Broadcom loses $19 billion in market value after bid to buy CA


By Rai and Sharma

(Reuters) - Chipmaker Inc's surprise bid to buy company for $18.9 billion wiped off the same amount from its market value on Thursday, with investors and analysts struggling to find a clear reason for the deal.

Citing an acquisition with no potential synergies, investors drove the company's shares down 19 percent to $197.50 - their worst day ever. CA rose 18.5 percent to $44.10.

Broadcom, which has mushroomed in value by buying out rivals in the past decade's surge in mobile phone production, agreed on Wednesday to buy company CA for $44.50 per share in cash, months after blocked its $117 billion mega-merger with Qualcomm Inc .

While some analysts said the shift in sectoral focus might prove another masterstroke by Officer Hock Tan, many raised concerns about a deal that lowers Broadcom's top line growth to 3 percent from 5 percent.

"It's the most bizarre, defocused, non-strategic acquisition of the last decade," said Eric Schiffer, of the Patriarch Organization, a Los Angeles-based private-equity firm.

At least two analysts downgraded the stock, while two other analysts cut their price targets. Brokerage was the most bearish with a price target cut of $63 to $245. (deal history under Hock Tan:

"What the Hock?" analysts from brokerage Evercore wrote in a note. "We think investors will likely be disappointed at this deal, which seems more financial engineering/PE driven than due to any strategic rationale."

Broadcom's famously ambitious has built the company from a fledgling chipmaker to a global powerhouse through a series of big deals, and is widely respected by Wall Street for his business acumen.

"A new and unexpected initiative seems likely to create a multi-quarter share overhang," wrote from

Susquehanna said the foray into the may have been driven by a lack of viable options in the industry and increased regulatory scrutiny.

CA's main business is selling software for big, mainframe computers, in which it is second only to .

But while that business generates cash flow of $10 billion a year, its revenue growth has been flat as more customers choose over old-fashioned hardware.

"While CA is a departure from Broadcom's core business, it is consistent with its track record of acquiring out-of-favor, market leaders with high cost structures," Jefferies analysts said.

"Importantly, AVGO has consistently demonstrated its ability to drive costs down and margins of its acquisitions up, often measured in 1,000s of basis points," they said.

Some analysts speculated that Broadcom's ability to rein in costs would help it use CA as a platform to build a business in the that simply offsets the risks of the highly-competitive business.

"Management is showing its ambition to move beyond silicon to be that of an Infrastructure Technology company," analysts said.

After the deal, the combined company would have roughly 71 percent revenue from and 28 percent from software.

"We think many investors may not like it - at least initially - but this does open the door for a new angle to the story and further improves AVGO's capital return potential (we model $10/shr dividend in F19) in the meantime," said.

(Reporting by Rai and in Bengaluru; editing by Patrick Graham, Bernard Orr)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Fri, July 13 2018. 04:02 IST