By Joe Clabby, President, Clabby Analytics
On Wednesday, July 11th, Broadcom signaled its intention to acquire CA Technologies (CA) for $18.9 billion. This offer has created a fair amount of buzz as IT industry and financial analysts grapple with what this acquisition might mean to the marketplace – and as CA Technologies customers grapple with what it might mean to their future software and technical support costs.
At first blush, we were struck by the irony of this potential acquisition. CA Technologies (formerly Computer Associates) became a $4B+ company by taking over other companies, discarding marginal software, raising prices on installed-base software and eliminating redundant sales, general and administrative (SG&A) costs. Now the same thing is about to happen to CA. Apparently, what goes around, comes around…
Looking at this potential deal from 50 thousand feet, this acquisition appears to be what we call an “operational efficiency” takeover. What Broadcom is betting is that they can greatly reduce CA’s operating costs by eliminating superfluous SG&A, while leveraging CA’s strengths (mainframe, security and DevOps software) to expand marketshare. This is the same kind of takeover we saw when Oracle took over Sun Microsystems – and that deal helped Oracle acquire new customers, enter new markets and gain some important intellectual property.
Can Broadcom make this work? Probably – but expect some revenue flux and customer turmoil until the whole thing settles down.
What does Broadcom get out of this deal?
Broadcom has a reputation for managing its businesses efficiently. (Some might say “ruthlessly”). Earlier this year, Hock Tan, Broadcom’s CEO, was primed-and-ready to acquire Qualcomm (a maker of next generation mobile technologies) for $110 billion – but these efforts were shut down by U. S. antitrust agencies.
With Qualcomm off-the-table, Broadcom went hunting – and found a pretty well managed company with a lot of upside market potential – CA Technologies. The upside is that CA’s major strengths are in growth markets, including systems management, DevOps, mainframe operations management, security and compliance and analytics that are of particular interest to large enterprises. If Broadcom can find ways to accelerate CA’s growth in these markets, then it could realize a fairly rapid return on its investment.
What Broadcom will get if it acquires CA Technologies is a company that has held its revenue in the $4+ billion range for a number of years – but that has also been unable to grow. If Broadcom can integrate its own technologies (infrastructure, wireless communications, enterprise storage and industrial/other markets) with CA’s software offerings, some interesting combinations might help drive overall sales higher.
It should be noted that the tender offer also reveals a common theme: Broadcom realizes that to expand into new markets, it needs to buy expertise. Broadcom would have fulfilled that need in the mobile marketplace had it purchased Qualcomm – but in a different marketplace. By acquiring CA Technologies, Broadcom is buying enterprise IT expertise in the management, analytics, security and services marketplaces.
Is there really synergy here? Yes. Both companies are involved in infrastructure design and development. If successful, Broadcom’s bid should help the company pursue more data center infrastructure (systems integration, server integration and management, storage, networking) opportunities.
Consider what Broadcom already does in data center infrastructure. The company builds solutions for software-defined networking, cloud scale networking, data center network solutions, scalable computing, Big Data flow architecture, SAN automation, data protection with RAID, storage fabrics, broadband access and fifth generation Wi-Fi, innovative wireless solutions – and more. With the exception of the wireless angle, these are all technologies where CA Technologies, in one way or another, also plays.
CA Technologies offers the ability to manage Broadcom’s portfolio better, but it also brings with it deep research and development expertise, and thousands of new accounts (giving Broadcom broader reach into data centers across the world). Plus, it strengthens Broadcom’s reach into new high growth markets such as security and blockchain.
What does this mean to CA customers?
It means change: some for the better and some for the worse.
Expect that marginal CA products –loss leaders, for example – will be headed for the chopping block. So, any low-margin, low-growth products will either be discontinued, farmed-out, sold or discarded. Alternatively, if kept in the portfolio, their prices will likely be raised (significantly).
It also means that the face of the sales organization will change as there are bound to be redundancies in customer coverage between the two companies. Expect that service and support will be scrutinized in order to reduce costs. And expect that administrative systems will change (this will likely be the area hardest hit by layoffs). As in numerous similar deals, the acquirer’s employees will usually win out over those who work for the acquired company.
On the other hand, any promising products (and CA has a lot of them in the areas of security and in DevOps – as well as in analytics and blockchain) are likely to see more investment.
We stopped covering CA a few years back because we saw the company in stasis. It had a good strategy; it could consistently deliver $4+ billion in revenue annually; it had jumped around a bit in upper level management (finally stabilizing on a good CEO – Michael Gregoire, who knows how to control costs and understands technology) – but there were too many holes in its product offerings. We saw CA as behind in analytics and in operations management – and its cognitive and blockchain efforts were nowhere to be found. It was just plain “dull.”
We recently started to cover CA again, starting when it brought a new GM, Greg Lotko from IBM, into its mainframe organization. Greg is the type of leader who we perceived would do some interesting things and grow revenue in the CA mainframe space. We plan to keep covering this aspect of CA’s business whatever happens to the Broadcom offer.
However, we believe that Broadcom is going to have a tougher time reducing SG&A costs at CA than the company probably assumes. Thanks to Gregoire’s leadership, CA is already running at a pretty efficient level personnel-wise. He has already streamlined and modernized the sales organization; he’s kept tight controls on hiring — he’s already “trimmed the fat.” Broadcom, we suspect, will be a bit surprised at how lean and mean CA already runs.
If it’s smart, Broadcom will keep CA’s best leaders and give them some marketing and development dollars to aggressively pursue growth opportunities (like blockchain). If Broadcom doesn’t cut too close to the bone during its post-acquisition process and the following reorganization – and also funds growth initiates while taking advantage of CA’s solid leadership teams – this acquisition could be a very good deal for both companies.