Broadcom Inc (Nasdaq: AVGO) stock plummeted more than 13 percent on Thursday after the company blindsided the market by announcing a massive $18.9 billion buyout of CA ( CA). The mega-deal will expand Broadcom’s addressable market well beyond that of its core business, but investors and analysts are concerned that Broadcom may be biting off more than it can chew.
Analysts say the potential pivot from hardware to software, which proved difficult for Intel Corp. ( INTC), will be a challenging transition for Broadcom. In addition, since there is almost no overlap between CA and Broadcom’s businesses, the deal will provide no clear cost synergies.
[See: 10 of the Best Tech ETFs to Own.]
To make matters worse, a large, aggressive buyout of a software company seems to contradict the message Broadcom management has been emphasizing and shift the potential investment thesis for the stock.
“Management has stressed that Broadcom is focused on delivering shareholder value through organic growth, capital return and tuck-in acquisitions,” Nomura Instinet analyst Romit Shah says. “This deal hurts management’s credibility, in our opinion.”
Evercore ISI analyst C.J. Muse says the motivation for the deal may simply be to beef up Broadcom’s earnings numbers in the near term.
“We think investors will likely be disappointed at this deal, which seems more financial engineering [and] P/E-driven than due to any strategic rationale,” Muse says.
While Broadcom says the deal expands the company’s long-term total addressable market from $65 billion to more than $200 billion, Muse says investors will likely be worried that management is losing its focus on what it important for the company. For example, the addition of CA will lower Broadcom’s long-term annual revenue growth rate from 5 to 3 percent, Muse says.
“We continue to like AVGO and the world-class management team and CEO, but the current deal makes no sense to us,” Muse says.
Broadcom pays a generous 3.4 percent dividend yield and recently committed to a $12 billion share repurchase program. However, the steep price of the CA deal could prohibit additional capital returns, Muse says.
[See: The 10 Most Valuable Tech Companies in the World.]
Broadcom says it expects the deal to help create shareholder value and that it will close in the fourth quarter of 2018.
Nomura has a “neutral” rating and $225 price target for Broadcom. Evercore has an “in-line” rating and $275 target for AVGO stock.
More from U.S. News
7 ETFs That Let You Invest With the ‘Smart Money’
9 Stocks Bank of America Loves in an Unpredictable Market
8 Great Investing Apps and Sites for Millennials
The Broadcom Inc (AVGO) Stock Bull Thesis Has Completely Changed originally appeared on usnews.com
