Two great tastes that taste great together

Chips and salsa? Sure. Chips and software? Not so much. Broadcom’s risky plan to pay $19bn for CA Technologies in an effort to become a software vendor left Wall Street puzzled, even mildly derisive. And when investors talk like that about a company, it’s almost invariably because they’re dumping it.

That’s certainly the case with shares of Broadcom, which plummeted 15% after the deal was announced. The decline slashed $15bn from Broadcom’s market value, almost equal to the amount of cash it is handing over for CA in the largest-ever purchase of a software provider. Weighing on the minds of investors is the tattered history of other hardware vendors that stumbled when they stepped into the enterprise software business.

The multibillion-dollar selloff is significant for two reasons – one that’s specific to acquiring a semiconductor firm and one that might have broader implications for large-scale tech M&A. For Broadcom, the reaction of Wall Street appears to be a penalty for it straying from a plan that had made it a favorite name among investors, who had doubled the value of the company since the start of 2016.

Much of that bullishness stemmed from the fact that Broadcom had been a disciplined financial operator, posting some of the healthiest margins in the semiconductor industry. (Recently, the company has been humming along with gross margins in the high-60% range and operating margins in the high-30% range.) It had a similarly disciplined approach to M&A, focusing on consolidating the mature semiconductor industry. That restrained strategy went out the window as it strayed into the unrelated field of enterprise software with CA.

More broadly, Wall Street’s stern reaction to Broadcom’s big bet reverses the support that investors have typically extended to acquirers in many of the tech industry’s largest transactions. In recent years, shares of buyers have largely been unmoved in the wake of blockbuster deal announcements, despite the dilution that can come with the acquisition as well as the possible integration difficulties.

But investors didn’t extend that confidence to Broadcom. In their view, the move from semiconductor giant to software provider is a step too far. 451 Research subscribers can view our full report on the massive transaction.

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