Decoding Broadcom Platform acquisition strategy

Broadcom platform acquisition strategy

In this blog, we will discuss about the Broadcom platform acquisition strategy and how it resonates with conventional Private equity acquisition model.
We will also discuss about the success that Broadcom had following this acquisition strategy and predict if this strategy would be successful in Symantec deal.

Broadcom platform Acquisition strategy

  1. Broadcom whose parent company is Avago has grown multiple times by its aggressive M&A strategy that is ssuccessfully helmed by its CEO Hock Tan.
  2. When we look at Broadcom history, its growth from $4B company in 2013 to ~$23B in 2019 has been mainly through acquisitions.The parent company Avago first merged with Broadcom which is a leading semiconductor business with a huge market share in Wireless networks.Following this acquisition, Avago decided to continue with Broadcom name.
  3. Broadcom operates in a semiconductor industry which is a very fragmented industry and has also become commoditized to an extent.Due to the decline in the market growth, the only way to grow would be to acquire competitors and integrate them to reduce cost and increase earnings.
  4. Broadcom followed this strategy and acquired competitors through a leveraged acquisition approach and integrated the company to realize value.As Broadcom has built an excellent acquisition integration capability, it had a successful track record in all its acquisitions.Broadcom was able to return the excess free cashflows from its acquisitions back to its shareholders.

Broadcom failed hostile bid for Qualcomm

  1. Due to the increased consolidation in semiconductor industry and with US China Trade war, Broadcom was looking at large acquisitions and made an hostile bid to acquire Qualcomm for $117B.Qualcomm is a market leader in semiconductor industry, known for innovation and seen as a technology leader for 5G network.
  2. Broadcom was based out of Singapore and its parent company Avago has its roots in China.Fearing that its bid to acquire Qualcomm could attract review from CFIUS, a committee that reviews the foriegn investments done by outside countries in acquiring home grown US companies, Qualcomm redomiciled its headquarters from Singapore to US in order to escape review from CFIUS.
  3. Qualcomm shareholders were happy to sell their stake as Broadcom increased its bid price for Qualcomm, but President Trump succeeded to thwart the deal by an executive order with a reason that this deal can compromise the internal security.

Broadcom focus on Enterprise Infrastructure Software business

  1. Post its failed bid to Qualcomm, Broadcom changed its business strategy to enter into enterprise software business.The enterprise software business is a growing market and has higher margins than Semiconductor business.The rationale behind Broadcom entry into Software segment is due to the high maturity in Semiconductor industry which has become saturated.There were no good acquisition targets available in the market in Semiconductor sector for Broadcom to acquire, hence it diversified its business offering to create a new business portfolio in enterprise software segment.
  2. The acquisition strategy of Broadcom was simple and similar to a Private equity model.Identify target companies that are cash cows – Companies traditionally having higher reputation in market, matured and deep customer relationships with a service offering whose growth is declining.Post acquisition, Broadcom would make the target company lean and efficient with huge focus on cost synergies.As Broadcom has an excellent integration framework, it was confident that it can be successful in executing the synergies targets.

Broadcom acquisition of CA

  1. Broadcom’s first big acquisition in Enterprise software segment was its acquisition of Computer Associates for $19B.CA is a mature enterprise mainframe software company with revenues of $4B.The company was having issues in its growth and wanted to move towards cloud services from mainframe software platform.
  2. Broadcom acquired CA and divested CA businesses that are no longer profitable or strategic to its future growth.Broadcom divested CA app business and also outsource its IT services business to its clients.
  3. Broadcom then decided that it will no longer invest CA Salesforce in new customer acquisitions.Broadcom wanted to increase CA market share in existing client base.CA customer base was 80% fortune 2000 companies.
  4. Broadcom relentless execution strategy of cost cutting helped increase CA EBITDA from $350M to ~1.3B.Some of the reasons for its success apart from its proven acquisition integration model was that CA didn’t have much competition in enterprise mainframe segment.Hence even though the market growth was declining, customer stickiness was high.This helped Broadcom achieve its synergies targets.

Broadcom Symantec deal

  1. As Broadcom acquistion of CA was successful, it continued to look at targets in enterprise software space which can be rolled up into CA and Brocade business.
  2. Broadcom evaluated Tibco, Compuware ,BMC and Symantec. All these companies are enterprise software companies that focused on providing solutions to business operations and infrastructure.These companies are matured and was having issues in growth.
  3. Hock Tan strategy was to focus on enterprise infrastructure segment because technologies embedded in infrastructure has higher customer stickiness. Customers generally would find it difficult to switch vendors as it is very difficult to change infrastructure. Though these businesses have low growth, but they are stable.
  4. Broadcom decided to acquire Enterprise security business of Symantec for $10.7B.Symantec is a market leader in Enterprise security segment but its revenues are down due to high competion from Cisco, Pao Alto networks and from new age startups like Crowdstrike.
  5. Broadcom acquisition strategy for Symantec would be similar to CA.It would focus on cost cutting and streamline its business.It would divest all low performing business segments.
  6. Broadcom has decided to focus on End point, Web security, Cloud security and Data leak prevention business of Symantec.As per Gartner, Symantec is a market leader in above segments.
  7. With this acquisition Broadcom would add $2B revenues and 1.3B in EBITDA due to high cost synergies.
  8. As Symantec is a US company, Broadcom has to secure US regulatory approval to close the deal.With rising tensions between US and China, it would be interesting to see if Broadcom can secure approvals.

Criticism in Broadcom acquisition strategy

  1. Inspite of Broadcom successful track record in acquisitions, there are few risks in this strategy.
  2. First Broadcom raises debt to finance its acquisitions. It already has ~$17B in debt and any free cashflows from these deals should go for repaying the interest expenses.Broadcom also stands a risk of downgrading its credit rating with such a huge exposure in debt.
  3. This acquisition strategy is a Financial engineering approach where a company is bought and then costs are cut to improve margins.These acquisitions might be positive for Broadcom but for target companies, this acquisition does not bring any positives.Broadcom is not looking to increase growth of the target companies or helping it achieving its market share by investing in R&D or expanding to new markets.
  4. Enterprise software is a different business compared to Semiconductor business.In software, growth is purely innovative driven and the companies need to churn out new products that satisfy the customer unmet needs.This is the only way how business can retain enterprise customers.Broadcom strategy of financial engineering is a short term tactic to increase earnings but at longer term, this strategy may not add any value to target company.
  5. Enterprise security is a competitive industry and Symantec has lot of competitors.Broadcom does not have any competency in Enterprise security business and would need to rely on Symantec executives to achieve growth.Already Symantec revenues are declining and it is very difficult to understand how Broadcom can help Symantec increase its revenues and market share in this highly competitive Cybersecurity space.

Conclusion

  1. Broadcom platform acquisition strategy is similar to Private Equity companies acquisition model where a company from different business is bought and then rolled up with bolt on acquisitions. The main focus is on cost cutting improve earnings.
  2. Broadcom strategy to build a portfolio in Enterprise software business mainly through a consolidation approach may not work long term.Software companies need innovation and has to churn out quality products to retain and build market share.Broadcom concept for having a lean business for its acquired businesses does not help in growing its topline.
  3. At a time where companies are compromising on profitability to achieve growth, Broadcom acquisition strategy of achieving profitability at the expense of growth might get a thumbs up from its shareholders now, but its long term sustenance is a question mark.


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