Broadcom's Deal for CA Puts Big Iron in the Spotlight

Last week, chipmaker Broadcom has announced it made an all-cash, $18.9 billion bid for CA Technologies -- formerly Computer Associates -- a leader in mainframe-style computing.

Broadcom has an interesting history.

It recently made a bid for Qualcomm before it was stopped over concerns about the patents that Qualcomm holds passing out of US jurisdiction. Broadcom was based in Singapore before it moved its headquarters to the US as a way of appeasing federal regulators about Qualcomm. (See Trump Cites National Security to Kill Broadcom's Proposal for Qualcomm.)

While it makes chips for WiFi, Bluetooth, and GPS connectivity in smartphones, Broadcom has made a bigger impact by its purchases of established players with leading products in a field. Massive cost-cutting usually happens to the acquisitions that it makes, along with the divestiture of product lines that are less profitable than corporate targets.

The good old days
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In the last 12 years, Broadcom has spent $50 billion in such acquisitions. It has become more of a financial engine than an innovation engine.

CA is widely known for its presence in the corporate IT infrastructure field. It has products that enable IT operations, digital security, project management, as well as for developing applications. Its software runs on "big iron" mainframe computers, not on smartphones or smaller devices.

This has led to lots of confusion about how such a product mix would fit into Broadcom's portfolio. (See Unknown Document 744685.)

Most companies make acquisitions in some area that allows them to improve what they're already good at. There might also be access to new markets for their existing products. Neither of those come to mind with Broadcom's bid.

CA is software, Broadcom is hardware.

What the deal actually does is move Broadcom into profitable software. Enterprise tools are fairly sticky -- once they are installed they tend to stick around. It also gives them a major lock on the enterprise IT tool market. This is the boring, put profitable stuff that keeps a business running.

Not only that, software is far less cyclical than semiconductors and can provide a high-margin recurring revenue.

As CA put it in its announcement: "The majority of CA's largest customers transact with CA across both its Mainframe and Enterprise Solutions portfolios. CA benefits from predictable and recurring revenues with the average duration of bookings exceeding three years."

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And it seems that Broadcom learned from its Qualcomm experience as well. CA and Broadcom do not overlap in what they do, hence regulators will be much more inclined to let what results from the bid alone.

But the CA announcement also mentioned something that may indeed concern regulators: its patents. The announcement noted that "CA … currently holds more than 1,500 patents worldwide, with more than 950 patents pending."

What is represented by those patents remains to be seen.

Broadcom, however, now seems to want to avoid the flux of the chip market by taking a major part of profitable mainframe computing into itself.

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— Larry Loeb has written for many of the last century's major "dead tree" computer magazines, having been, among other things, a consulting editor for BYTE magazine and senior editor for the launch of WebWeek.