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CA co-founder, analysts call $18.9 billion Broadcom deal surprising

No word yet on the deal's impact on the 1,000 employees at CA's Islandia facility, but analysts said Broadcom has a history of acquiring companies and "trimming them down."

CA Technologies co-founder Russell Artzt said CA was

CA Technologies co-founder Russell Artzt said CA was ripe for an acquisition, but Broadcom was an unlikely suitor. Photo Credit: Yeong-Ung Yang

A co-founder of CA Technologies and Wall Street analysts Thursday voiced surprise at the $18.9 billion bid for the software company by semiconductor maker Broadcom Inc.

Broadcom investors, meanwhile, were wary, sending shares of the San Jose, California, company down about 14 percent to close Thursday at $209.98. Shares of CA climbed almost 19 percent to $44.15, close to the $44.50 per share value of the acquisition deal announced after Wednesday’s market close.

Russell Artzt, who founded CA in the 1970s with Charles Wang, said in an interview he had been expecting a software company like Oracle or SAP to bid for the company and was taken off guard by the chipmaker’s offer.

“I don’t know if their strategy is to go into the software business and grow it, or if they...just bought it to make a profit,” said Artzt, now executive chairman of Melville-based RingLead Inc., which makes marketing automation software.

Artzt said growth at CA has been flat in recent years, setting the stage for an acquisition.

Officials at CA, which had about 11,300 employees globally as of March 31, did not respond to questions about the deal’s impact on the roughly 1,000 employees remaining at the Islandia facility, whose lease expires in August 2021.

In 2002, CA, then known as Computer Associates International Inc., had 16,000 employees, including 2,500 on Long Island. The company moved its headquarters to Manhattan in 2014.

Broadcom’s growth strategy in the past has relied on acquiring semiconductor companies “and then trimming them down to maximize efficiencies,” analyst Sejuti Banerjea of Chicago-based Zacks Investment Research said in a note that characterized the CA deal as a “daring move.”

Though CA has been downsizing in recent years, Artzt said “there’s always more to cut.”

He said CA has largely shifted its software development to Santa Clara, California, leaving legal, finance and human resources functions on Long Island.

“There aren’t many tech people left in Islandia,” he said.

A research note by Harsh V. Kumar, an analyst at Minneapolis-based Piper Jaffray & Co., said he expects the Broadcom team eventually to take over sales responsibilities for CA software, “reducing one of the major costs of a pure-play software company.”

Analysts said they were startled by the foray into the software business by Broadcom, which historically has trimmed expenses at the companies it acquires.

“There isn’t much in its past to suggest that it would head into software next,” Banerjea said. “So investors are understandably concerned about how this integration will go and ... whether the company will succeed in its diversification-beyond-semis [semiconductors] strategy.

“No wonder then that the shares plummeted following the announcement.”

Another analyst, Kirk Materne of Manhattan-based Evercore ISI, said no one “would have imagined this combination,” which highlights the “growing strategic importance of software to ‘nontraditional’ acquirers.”

Broadcom makes semidonductors and other devices used in communications infrastructure and data centers.

The companies’ boards of directors approved the deal, which is expected to close by year’s end pending regulatory and CA shareholder approval.

A bid by Broadcom to acquire Qualcomm Inc., a maker of chips for mobile devices, was blocked by the U.S. federal government on national security grounds in March. Broadcom, formerly based in Singapore, moved its headquarters to San Jose in April.

In the fiscal year ended March 31, CA had $2.2 billion in revenue from mainframe software, more than half of its total revenue of $4.2 billion.

Overall annual revenue was up compared to fiscal 2016 and 2017, but remained below levels in fiscal 2014 and 2015.

But Banerjea said the mainframe business is “likely to generate a steady flow of revenues.”

Artzt said that while few new companies deploy mainframe computers, big banks and insurance companies continue to rely on legacy systems.

“It’s a very sticky product,” he said.

CA by the numbers

Began operations: 1976

Initial public offering: 1981

Employees: 11,300 (as of March 31)

Long Island address: 1 Computer Associates Plaza, Islandia

Fiscal 2018 revenue: $4.2 billion

Fiscal 2018 compensation of CEO Michael Gregoire: $12.6 million

Broadcom's acquisition offer: $18.9 billion ($44.50 per share)

Closing stock price Thursday: $44.15

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