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Why Analysts Don’t Like Broadcom’s CA Technologies Acquisition

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Oct. 10 2019, Updated 9:19 p.m. ET

CA Technologies acquisition

Broadcom (AVGO) has announced its acquisition deal with CA Technologies (CA), one of the world’s leading providers of information technology and software solutions, in a cash deal worth $18.9 billion. According to Nomura Instinet analyst Romit Shah, Broadcom believes the agreement would deliver value to its shareholders through organic growth. It comes after a failed Qualcomm (QCOM) merger. However, a lot of analysts believe the deal is not in sync with Broadcom’s strategic focus.

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Analysts downgrade the stock

Soon after the acquisition was announced on July 11, a lot of analysts downgraded Broadcom stock and slashed their price targets. The Nomura Instinet analyst cut his price target to $225 from $250 and kept his “neutral” rating for the stock. The Evercore ISI analyst lowered his rating for the stock to “in line” from “buy.” The B. Riley FBR analyst also lowered his rating and slashed his price target. Later, Goldman Sachs analyst Toshiya Hari downgraded Broadcom stock from a “buy” to a “neutral” and cut his price target from $300 to $220, stating that the acquisition of CA’s software business is unrelated to Broadcom’s core competency.

According to analysts, the buyout deal has raised doubts over Broadcom management’s long-term growth prospects for its core wireless and wired communications chip businesses. The deal has been compared to rival Intel’s (INTC) purchase of security software company McAfee, which was bought in 2011 but ultimately sold to a private equity firm in 2017.

However, Broadcom believes the acquisition of CA Technologies will help it build a leading infrastructure technology company. Some analysts are backing the company’s decision. UBS analyst Timothy Arcuri has maintained his “buy” rating for Broadcom with a price target of $330. He believes in the company’s proven track record of growing through value acquisitions. He also believes that Broadcom could grow in the infrastructure software space with this deal.

Broadcom stock

Since the acquisition announcement on July 11, Broadcom stock has fallen ~4.7% as of September 7. It nosedived to $202.46 on July 13 on negative views of its acquisition of CA Technologies. On a year-to-date basis as of September 7, Broadcom stock has fallen ~8.2%. In comparison, its peers Intel, Qualcomm, Nvidia (NVDA), and Micron have risen 2.5%, 13.1%, 40.5%, and 9.1%, respectively, in the same period.

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