Broadcom has always grown by acquisition, driven originally by Henry Nicholas and Henry Samueli, and later after it was itself acquired by Avago after a series of scandals. But the deals have always been at the component or embedded technology level.
The CA deal is much more about mainframes and enterprise software and services, and Broadcom is a major supplier of networking devices and systems for data centres. The deal is also about protection after the ambitious bid to acquire Qualcomm. Failing to create a chip giant leaves Broadcom vulnerable to other players in the market, which CEO Hock Tan knows all too well.
“This transaction represents an important building block as we create one of the world’s leading infrastructure technology companies,” said Tan. “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. We intend to continue to strengthen these franchises to meet the growing demand for infrastructure software solutions.”
But the deal also highlights a move back to vertical integration in the industry. While Amazon and Apple have bought chip designers, now the chip designer is buying a service provider. As the cost of chip design and manufacture increases at 10nm and below, companies are looking to benefit from the margins further up the value chain, and vertical integration is coming back as a result. This deal marks a signficant move in that trend for electronics companies.
“We are excited to have reached this definitive agreement with Broadcom,” said Mike Gregoire, CA Technologies Chief Executive Officer. “This combination aligns our expertise in software with Broadcom’s leadership in the semiconductor industry.”
CA, formerly Computer Associates, was founded by Charles Wang (no relation to the founder of computer maker Wang Laboratories) and Russell Artzt in 1976 but was hit by a series of accounting scandals in 2007 onwards.
The move will enhance Broadcom’s margins, as one might expect from a software deal, but not that much. The combined group will have gross margins of 55% after completion at the end of the year, compared to current margins of 50%, with a combined turnover of $24bn. This compares to Broadcom’s current $17bn turnover and Qualcomm’s $22bn, putting the company out of reach of many potential buyers.
This is a long way from the collection of chip designers that both Henrys put together.
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