Broadcom’s play for Symantec goes too far

Technology companies that target fickle consumers can die in a flash. (Juicero, anyone?) The ones that sell technology to businesses tend to hang on a bit longer.
That’s why old-guard technology companies that have lost relevance and stopped growing — think BMC Software, Compuware and Tibco Software — have been ripe takeover targets in recent years for the private equity firms that take an unloved company and rehab it, or milk it for every last dime. The chip maker Broadcom Inc. and its chief executive officer, Hock Tan, have honed reputations as private equity-like seers of technology sectors that can be consolidated and pruned to extract value.
But Broadcom is taking this idea too far. A year ago, it made a deal to buy a slowly dying business software company, CA Inc., for nearly $19 billion. It was an odd foray into software, and a fairly expensive one. Broadcom handled communications around the acquisition poorly, and its stock price initially suffered as a result, although it has managed to squeezed costs out of CA to the point where the acquisition has justified itself financially.
Now, Broadcom is in talks to purchase the troubled security software company Symantec Corp., according to Bloomberg News, in a deal that would likely cost significantly more than
$13 billion.
Financially, the Symantec deal is a classic Broadcom tactic.
Tan and Broadcom have their eye on rolling up aging business-software companies like Symantec and CA, similar to how the company made a series of deals to acquire and consolidate multiple semiconductor companies.
Using the typical Broadcom blueprint, Symantec can pare costs and improve operations to the point where it is contributing profits at a significantly healthy margin.
Piper Jaffray analysts estimated that under Broadcom’s watch, Symantec could have operating margins of more than 60 percent, up from an operating margin of about 13 percent, excluding restructuring costs, in Symantec’s fiscal year ended in March. With those margins and an estimated $1 billion in cost costs, Piper Jaffray reckons Symantec can add nearly $1.8 billion to Broadcom’s annual net income.
But Broadcom’s extension of its private equity-style play risks undermining confidence in the company just as it and other semiconductor manufacturers are grappling with existential threats. Ultimately, investors need to ask themselves how much longer Broadcom can play out its strategy of being an operating company in a rapidly changing industry, while simultaneously managing a private equity portfolio to milk for profits.
Yes, that’s how Broadcom made its reputation. Overplaying that strategy threatens to undo that hard-won reputation.

—Bloomberg