Analysts are giving mixed review to the $19 billion deal that chip giant Broadcom (AVGO) has reached to buy software maker CA Inc. (CA) .
"This deal hurts management's credibility," Nomura Instinet analyst Romit Shah wrote in a note about the merger. "To say this came out of the left field would be an understatement."
Broadcom announced plans late Wednesday to buy CA for $44.50 a share in cash -- a 20% premium from the stock's price prior to the deal's disclosure. However, Wall Street has so far panned the deal. While CA shares rallied some 18.7% to close Thursday at $44.15, AVGO tumbled 13.8% to $209.94.
Shah cut his price target on Broadcom to $225 from a previous $250, saying that synergies from the deal are "not obvious."
CFRA Research analyst Angelo Zino likewise scaled back his AVGO price target to $280 from an earlier $312 because he believes the deal will reduce Broadcom's top-line growth to 3% from a previously expected 5%. However, Zino viewed the deal as positive on balance, saying the diversification and recurring revenue from CA's subscription-software model will boost incoming cash flows and help establish Broadcom as a technology-infrastructure company.
"If Broadcom tried for another big acquisition of another semiconductor company, that is going to face some significant regulatory scrutiny," Zino wrote in a note. But by buying CA, "their strategy continues to be seeking double-digit earnings growth in both terms of organic and inorganic growth."
The analyst estimates that Broadcom will improve EBITDA margins to more than 55% from a current 48% within 12 months of the deal, smoothing out what can be highly cyclical peaks and valleys in semiconductor earnings.
An even more upbeat assessment came from Piper Jaffray's Harsh Kumar, who reiterated his $293 price target for AVGO.
"In our opinion, the acquisition of the CA follows the same model Broadcom has always deployed -- sticky business, few alternatives in the market, and leading market share," Kumar wrote in a note. "We believe CA meets the definition of a Broadcom franchise, which is a product group where the company is a market leader in an established, sometimes-niche market."
Bernstein Research analyst Stacy Rasgon likewise called the deal similar to other mergers that resulted in Broadcom successfully integrating an acquired company.
"On a purely financial stand-alone basis, we could argue that CA has the typical characteristics of a franchise as AVGO defines it, with an extremely profitable, sticky mainframe business co-existing with an enterprise segment that appears ripe for rationalization," Rasgon wrote in a note.
