Broadcom's Leap Into Software Through CA Gets a Rude Reception From the Market

 | Jul 12, 2018 | 10:44 AM EDT
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There isn't any specific news driving the action Thursday morning but market players are more optimistic about trade wars and are looking to put cash to work. The opening gap was sold quickly but the indices bounced right back to opening highs. Breadth is running 3,775 to 2,675 positive and there are about 115 new highs so far.

While this isn't a wild buying spree, it does show that traders are still optimistic that the trade-war issue is not going to kill the market at this point. There also is some hope that earnings season is going to deliver some positive catalysts.

I made a couple minor sales into strength and started averaging into a small position in Zogenix ZGNX, which had good news this morning about its anti-seizure drug.

I continue to have a hard time finding ways to put cash to work but at least there is a good amount of green on the screens.

One stock that definitely isn't in the green is Broadcom (AVGO) . In recent years the market has generally liked some of the big acquisitions that have been made. Both the buyer and the acquired would trade up on the news as the market celebrated synergies and reduced overhead.

Unfortunately for holders of Broadcom the market is not so pleased with its planned acquisition of CA, Inc. (CA) for $18.4 billion in cash, which works out to $44.50 per share for a stock that was trading at $37.21 at the close Wednesday.

The problem is that Broadcom is looking to enter an entirely new area and shift away from its focus on semiconductors. CA is involved in enterprise software that focuses on security and infrastructure applications and there are some major questions about this strategic shift.

Broadcom has done well with its "roll-up" strategy in the semiconductor sector but there are questions now about whether the chip cycle may be peaking and whether this sort of strategic shift to software is an ill-conceived attempt to diversify away from the cyclical nature of chips.

The stock gapped down about 15% and went as low as $197.47 before bouncing. Typically, it does pay to rush in on a dip like this as it takes the "value" buyers some time to feel that there really is a bargain being created.

Broadcom needs to convince the market that its strategy is sound and that will take some time.



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