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You might remember Broadcom for making news earlier this year when they wanted to buy Qualcomm, but Trump’s administration said “no way” due to national-security issues.  Well, Broadcom is blowing up the news feeds again.  Broadcom announced that it was buying software company CA Technologies for $18.9 billion in an all cash deal and the stock price catered.

 

CA is well known for its mainframe software operations, which is still a cash flow cow.  However, their sales are flat and EPS, cash flow are on the down spiral due to companies moving to The Cloud.  But that’s not the reason why the stock dropped %14 in a single day.

 

>Raymond James told its clients it was surprised by the deal announcement and questioned the company's rationale.

>“To say the deal came out of left field is an understatement. We see no obvious business synergies between Broadcom’s semiconductor business and CA’s Software business,” analyst Chris Caso said in the report Wednesday. “This deal, since it is so far afield from Broadcom’s core businesses, will likely cause significant confusion about the company’s strategy.”

 

<center>[Source]( https://www.cnbc.com/2018/07/12/broadcom-plunges-after-wall-street-demolishes-companys-software-strat.html)</center>

 

Another Wall Street firm said the following:

 

>“CA is a legacy software company that specializes in mainframes - shared synergies are not obvious,” Nomura Instinet analyst Romit Shah said in a note to clients Thursday. “More important is that this deal runs completely against the investment narrative that management has been articulating. … Management has stressed that Broadcom is focused on delivering shareholder value through organic growth, capital return and tuck-in acquisitions. This deal hurts management’s credibility, in our opinion.”

 

<center>[Source]( https://www.cnbc.com/2018/07/12/broadcom-plunges-after-wall-street-demolishes-companys-software-strat.html)</center>

 

It’s apparent Wall Street is very confused at this point.  In trading/investing, when something doesn’t feel right, you sell and ask questions later.  Nevertheless, based on Broadcom ability to buy CA in cash, they are a cash cow themselves.

 

Broadcom’s annual dividend currently sits at $7.00/share.  The yield was 3% before the price drop and now the yield just got a little bigger.  With the Markets ranging in recent months due to many uncertainties, investors might buy the dip at some point.  However, after making new highs back in Nov 2017, price has struggled to climb higher.  In additional because the floor at $220 was just broken, I think there is more downside risk.  I think the new floor become $165 and I anticipate Smart Money stepping in at this level.

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 This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
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