How to buy nothing with 19 billion dollars.

Broadcom, months after having their $117 billion offer for Qualcomm blocked by the CFIUS, has now rebounded and has agreed to buy CA Technologies for 18.9 billion. Just like most rebounds, it doesn’t turn out too well. The fact that Broadcom bought a company with such a slow growth rate shows just how much Donald Trump has curved their plans when blocking the Qualcomm deal. Donald Trump’s screwed over more of Broadcom shareholders than Jeff Immelt did to GE shareholders. However, the fact of the matter on this acquisition is this: trust Hock Tan. This man has built one of the strongest semiconductors companies over the years through M&A. His formula is simple: make large acquisitions and bring the margins through the roof.

Maybe the only thing these two businesses have in common is their high margins. Also, CA has gross margins over 80%, and opens them up to a new vertical. In addition, Software is less cyclical, meaning that over the long term, it adds more earnings visibility.

Just a few months prior, Broadcom was prepared to offer over $100 billion in cash and stock to Qualcomm. Yes, it would have been transformative and would’ve created a semi powerhouse, but also would kill their balance sheet. With a smaller deal, Broadcom’s free cash flow can be more focused on returning cash to shareholders through dividend increases and share buybacks. With a valuation at 9x 2018 projected earnings with a modest growth rate, we think this could be a good buy the dip moment for this giant. 

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