July 12, 2018 / 8:28 PM / 4 months ago

Breakingviews - Broadcom chief uses up eight of his nine lives

A man passes Broadcom's Asia operations headquarters office at an industrial park in Singapore September 16, 2014. REUTERS/Edgar Su

NEW YORK (Reuters Breakingviews) - Broadcom Chief Executive Hock Tan has used up eight of his nine lives. With a single deal – the $19 billion acquisition of software company CA – he has torched a reputation slowly built through years of savvy acquisitions. Recovering from that will take time, luck and abstinence.

Until Broadcom vaporized nearly $16 billion of market value on Thursday, Tan’s record was exemplary. He realized that the semiconductor industry’s maturation made a compelling case for consolidation. Buying rivals meant costs could be slashed, resulting in hefty earnings growth. The stock rose sixfold over five years.

Buying the no-growth CA, which operates in a different sector, requires an amount of faith that even Broadcom can’t command. Sure, enterprise software clients tend to be loyal, prices can be raised, and costs might be cut. Barriers between differing parts of the tech food chain may be eroding over time. Still, HP and Intel’s attempts to get into software, or Microsoft and Alphabet unit Google’s bids to make hardware, don’t inspire confidence in corporate multitasking.

The size of the hit to Broadcom’s market capitalization implies this isn’t merely a question of overpayment. It’s not as if CA would be basically worthless under Broadcom’s management. Investors presumably think the deal will make Broadcom’s existing business fundamentally less valuable – or read this as a sign that they were too optimistic to begin with. Tan is effectively signaling that the best days of chip consolidation have passed.

Can he prove the market wrong? That would require several strong quarters after the deal closes, which should happen by the end of this year. Broadcom has room for another deal – its net debt will only be about two times EBITDA – but waiting may be wiser. And he is at the mercy of the tech cycle: the current boom in chips is getting long in the tooth. Investors love a visionary chief executive, but if Broadcom’s growth unravels, the CA blunder will leave Tan looking exposed.

Breakingviews

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