Why pay a 35% premium over fair value for CA, Technology?
Broadcom [AVGO] a leading designer, developer and supplier of a broad range of analog semiconductor devices on a global basis has agreed to acquire CA, Technology [CA] a provider of information technology management software solutions with expertise in mainframe, virtual and network (cloud) environments for $44.50/share. The combination of the two enterprises sounds interesting. But,
Why pay a 35% premium over fair value (CA Fv = $33/share)? We don’t know. A reasonable price would be in the neighborhood of $40/00/share.
We understand the concepts of synergy and collective benefit of development efforts and software/hardware advancements, but to pay such a high premium would require other considerations. The synergistic cooperation can be accomplished via a strategic agreement. Acquiring another company to accomplish this task is full of potentially unrecoverable disastrous outcomes.
Hopefully, management has a vision that will be shared with the markets that demonstrates why the premium is worth the risk. I hope it is not entirely based on savings. If it is, investors should ask how talent will be retained without increasing the #1 expense, compensation. How will management retain research & development expertise also without increasing the other highest expense. How will management retain the current cultures within each company or is someone going to prevail and will it be accepted? This is more difficult than most people can imagine. Disruption in talent is almost always the surprise, even though it should not be the case.
The premium is not necessary, unless you just want to buy something, anything. If that is the case, wait for the Fall Sale Event.