Broadcom's Symantec Play Goes Too Far

(Bloomberg Opinion) -- 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%, up from an operating margin of about 13%, 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. 

Consider the timing and the financial costs of Broadcom's effort to consolidate battered business-software firms. Last month, Broadcom reduced its revenue forecast for the year, citing the U.S.-China trade war and companies cutting their inventories of computer chips. Broadcom is highly exposed to the smartphone industry, where sales are stagnating, and to corporate networking equipment, where demand has been uncertain. 

Broadcom was being conservative in slashing its forecast, and the numbers may not come in as ugly as forecast. But it's worth asking whether Broadcom is spreading itself too thin by expanding its consolidation play in corporate software while it is grappling with serious issues in many of its product categories.

A deal for Symantec also would be a potential hit to Broadcom's balance sheet. At the end of April, it had $37.5 billion in total debt, after the CA acquisition doubled its debt load. Bloomberg Intelligence analysts on Wednesday said Broadcom's credit ratings could sink below investment grade if a Symantec acquisition goes through.

Stock buyers are now wary of the same Broadcom acquisition-hunting that they once loved. Shares of Broadcom fell almost 4% in early trading on Wednesday. Broadcom's failed pursuit of Qualcomm Inc., and its miscalculations of the politics around what would have been the biggest acquisition in technology history, bruised Broadcom's standing with investors. The continued pursuit of software consolidation hurts even more.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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