What's going on?
Broadcom – one of the world’s largest microchip makers – announced a $19 billion acquisition of software company CA Technologies on Thursday. The news catapulted CA’s shares up 18%, but Broadcom’s tumbled by 15%.
What does this mean?
Broadcom makes chips for computers, mobiles and broadband internet, among other things. It’s become a powerhouse by landing loads of acquisitions, giving its CEO a fair amount of popularity among Wall Street dealmakers.
Broadcom’s last takeover attempt before CA was Qualcomm – a rival chipmaker – but the deal was blocked by the US government on national security grounds. Although Broadcom said its focus would be returning cash to its shareholders after the failed acquisition, the company seemingly couldn’t resist a shopping trip. Buying CA – which deals in software for business infrastructure – will be uncharted territory.
Why should I care?
For markets: Investors aren’t buying the deal.
Broadcom’s investors are worried that the entry into new water might be an error, and have been selling their shares. Moving into a new market can be risky: Broadcom may lack the necessary experience, which could leave resources stretched. Investors might also be thinking about bad hardware-software tie-ups in the past (e.g. Intel-McAfee).
The bigger picture: A new market could represent even bigger opportunities.
The growth in business software development is big bucks. Lots of businesses are digitizing to stay agile, grow and not lose out to competition. The sector can also offer higher margins since it’s not easily copied (which can drive down prices). Broadcom already provides hardware solutions to lots of companies, and being able to offer a software solution could be a lucrative opportunity – with Broadcom as a one-stop shop for IT services.