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Analysts debate consequences of Broadcom's US$18.9bn move to buy CA

Broadcom shares tumble on the merger announcement as CA's stock soars
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Broadcom plans to fund the takeover with cash on hand and US$18bn in debt

Today’s parlor game among Wall Street analysts is analyzing the payoff from semiconductor maker Broadcom Inc’s (NASDAQ:AVGO) unexpected move late Wednesday to buy CA Inc (NASDAQ:CA) for US$18.9bn.

The all-cash deal values shares in the software company CA at US$44.50 per share, which represents a premium of about 20% to the closing price of CA stock of US$37.21 Wednesday.

Despite a show of support from some analysts, Broadcom investors seem less than impressed, sending the stock nearly 15% lower to US$207.30 in midday trade. Meanwhile, CA shares flew 18% higher to US$43.92.

Broadcom, which is based in Singapore, plans to fund the transaction with cash on hand as well as US$18bn in new debt financing.

Read: Wall Street heaps praise on Broadcom in wake of solid 2Q earnings

Shaul Eyal, an analyst with Oppenheimer, says the deal will allow Broadcom to establish a foothold in the business of providing software to manage many of the “processes critical to enterprises.”

CA is quite a different beast to Broadcom, as it specializes in mainframe software and also provides cloud services as well as a software-as-a-service (SaaS) business.

But Eyal suggests the takeover will help Broadcom make its mark as a full-service infrastructure technology company.

“CA brings with it a formidable (and recently rationalized) product portfolio, long-standing relationships with major customers, and a significant recurring revenue stream,” he wrote in a note to investors. He views the deal as a positive for CA shareholders and has a Perform rating on the stock.

“We believe this outcome represents a favorable development for CA shareholders,” Eyal wrote. "In recent years, CA has executed several strategic initiatives to enhance its long-term prospects, and this acquisition enables CA shareholders to more quickly realize the benefits of these initiatives."

Read: Qualcomm Inc slides after Broadcom Limited takeover is blocked

Despite the deal doubling Broadcom’s debt to US$35bn, Tristan Gerra of Baird Equity Research is bullish too and keeping an Outperform rating on Broadcom, as well as a US$290 price target on its stock.

Gerra estimates that the deal could add as much as 14% to Broadcom’s pre-tax income and 7% to 9% to its earnings per share depending on tax matters.

Broadcom expects the combined company to have revenue of US$23.9bn on a non-GAAP basis.

CA, which was formerly known as Computer Associates International, is based in New York City but operates in 40 countries. It currently holds more than 1,500 patents globally, with 950 patents pending, according to Baird Equity Research.

This week’s deal comes months after Broadcom’s efforts to buy rival Qualcomm (NASDAQ:QCOM) for US$110bn were squashed by President Trump over concerns over national security.


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