We could talk about the consumer business. We could talk about the possible synergies of Symantec's enterprise with Broadcom's purchase of CA last year. However, neither of those represent the "new" Broadcom. Instead, I see this buy as a follow-up to the CA buy because of one big thing: free cash flow.
Just as it did with CA, Broadcom buying Symantec is the approach of buying a business "annuity" with upside. And I'm really starting to buy into this concept.
In case you missed that discussion around the Broadcom-CA merger, you can begin the descent down the rabbit hole here.
It's a holiday week, so allow me to save time and explain.
If Wedbush and Oppenheimer are to be believed, this deal would go down valuing Symantec in the $15 billion - $20 billion range, so I'll use $17.5 billion as a starting point. Symantec has stable free cash flow around $1.2 billion, so Broadcom is looking at buying cash flow of roughly 7% per year (free-cash-flow divided by purchase price). Broadcom then takes that cash to buy back its own shares and pay a dividend to shareholders.
Obviously, it can use it to pay down debt as well and any debt below 7% essentially creates "free" money on the difference between the rate on the debt and 7%. We know it isn't truly free. There's risk involved in this deal, but Symantec would only equal about 10% of Broadcom's current market cap, so it has a reasonable limit.
In terms of upside, Symantec's consumer business, about half its revenue, is also stable despite facing heightened competition. I suspect the cost-cutting consolidation that we'd see on SG&A would be enough to maintain or even improve that stability. But it is the struggling enterprise business that could benefit from the merger.
Broadcom could fit the software (networking, cloud, and endpoint security) aspects of Symantec into its recent CA purchase for cross-selling and upselling. Add in some cost cuts here through the elimination of redundancy and that's where you'll find the upside potential.
If it wasn't clear before, it should be now. Broadcom has shifted its focus away from the hardware side of the business in terms of acquisitions. Perhaps the company feels comfortable with their position there.
Expansion is coming in the form of smaller software company buys that act as business annuities (high yields of free cash flow on the purchase price) with products Broadcom feels it can integrate to increase sales while decreasing expenses at the same time when compared to the pre-buyout levels.
While I don't love the strategy in terms of growth, it is intriguing from the terms of stability. I'd give the market a little time to digest, but I'd turn my focus more toward Broadcom than Symantec. I don't think we'll see another bidder, but if Broadcom were to dip into the $260 - $270 area, I'd get interested again.