Broadcom Finally Makes Its Pitch

By Anonymous

It took Broadcom AVGO 7.69% a little while to plug its latest deal, but late is better than never.

The chip maker used its fiscal third quarter report Thursday afternoon to better explain its rationale for buying CA Technologies . CA 0.07% The acquisition—first announced two months ago—signaled Broadcom taking a strategic turn deep into the enterprise software market. The company made little effort at the time to explain the move to investors, though, who reacted predictably harshly. Broadcom’s stock slid 19% in the days following the news and has remained down ever since.

So the company’s belated explanation Thursday was a step in the right direction. Broadcom chief executive Hock Tan said CA’s customer base, which includes “virtually all of the world’s largest enterprises,” gives Broadcom a new opportunity to sell its chip products, which are used in areas such as networking and storage. He said that companies in those spaces already spend “tens of billions” on IT infrastructure annually.

Investors seemed receptive, if not fully convinced. Broadcom’s shares were up more than 8% Friday morning, due at least partially to solid quarterly results. Ed Snyder of Charter Equity—one of several analysts who downgraded the stock following the CA announcement—said the strategy Mr. Tan described will require either Broadcom or its software customers to partner with an equipment maker. “Neither of those two approaches will be quick or easy, but it isn’t likely to matter near-term given the savings and divestitures that can be squeezed out of CA in the next 18 months,” Mr. Snyder wrote in a report Friday.

Broadcom’s shares, meanwhile, remained just under 11 times forward earnings even with Friday’s gains. That is a discount of nearly 23% to the PHLX Semiconductor Index. A risky, counterintuitive deal may rightfully keep the stock from fetching a premium for a while. But at this level, giving Broadcom’s gambit the benefit of the doubt isn’t terribly risky.

Write to Dan Gallagher at [email protected]