By Daniel Newman
Broadcom CEO Hock Tan is aiming to expand the semiconductor company’s footprint beyond its core chip business and move from a software also-ran to a powerhouse.
It was reported recently that SAS Institute, better known as SAS, may become Broadcom’s /zigman2/quotes/200646538/composite AVGO -0.47% next acquisition, with deal figures ranging from $15 billion to $20 billion for the 12,000-employee privately held firm best known for its analytics and data management software.
While Broadcom is best known as a semiconductor and infrastructure company, with products to serve data center, networking, broadband and wireless, it has aggressively moved over the past few years into software through the acquisitions of CA Technologies for $18.9 billion and Symantec’s enterprise software division for about $11 billion.
Since those acquisitions were made, Broadcom has seen the software business grow to nearly 28% of its overall revenue. However, in its most recent quarter, Broadcom’s software business grew much slower than its semiconductor revenue, seeing just 4% growth versus 20%.
Having said that, Broadcom has earned a strong reputation for its shareholder focus, which would make a sizeable deal like the one for SAS all the more appealing. The company commits 50% of its free cash flow to shareholders, buybacks, debt repayment and M&A.
To execute effectively on such a strategy, the business must be diligent in maintaining high margins. According to Goldman Sachs’ most recent U.S. Weekly Kickstart, the company in 2020 expanded its margins by more than 50 basis points and delivered some of the highest net margins in the IT space, at an estimated 41% for 2021.
Broadcom has also faced some new antitrust scrutiny for practices related to its broadband chips, allegedly being monopolistic in using anti-competitive tactics to steer its customers from using competitive products. With so much attention being paid to new antitrust legislation and president Biden’s recent executive order, this could slow any deal Broadcom is trying to make. However, I don’t see this potential acquisition having any issues passing scrutiny.
Growth through acquisitions
Broadcom is certainly in growth mode, and with more than $9.5 billion in cash sitting on the balance sheet, the company is well-positioned to make a deal of this size.
For Broadcom, it further diversifies the company’s prospects to be seen as a real player in software, which to date it has struggled to achieve. Other question marks would be around just how much revenue that SAS could bring to Broadcom and how efficiently Tan could integrate it into the Broadcom ecosystem.
To be clear, by integrate, I effectively mean to “right-size.” One of Tan’s best-known traits is his incredibly shrewd approach to growth through acquisitions, identifying synergies and extracting value that can lead to profits. This approach can work well in instances where the business being acquired heavily overlaps an existing business, but I see it as problematic when entering an almost entirely new space, which the company would be doing with the acquisition of SAS.
Even with the investments made in CA and Symantec, those companies’ software offerings are entirely different from SAS’s. Furthermore, as a privately held company led by co-founder and CEO Jim Goodnight, SAS has a reputation as a high-touch, family-oriented business environment. The culture of SAS could arguably be called polar opposite to the fast-moving, efficient machine that is Broadcom.
The company’s Cary, North Carolina-based headquarters is almost reflective of a city within a city, built over the past almost 50 years. Selling to Broadcom would reflect a clear changing of the guard, indicating that Goodnight didn’t see a succession plan to keep the company private or in the family despite having seasoned veterans, and children that work in the business.
The most likely CEO successor, Oliver Schabenberger, departed earlier this year after 19 years at the firm. That may have been a realization that a sale was the expected path forward.
In fact, in 2017, when Hock Tan made a run at Qualcomm /zigman2/quotes/206679220/composite QCOM +0.12% , it was perhaps the biggest concern for markets and investors that in the chase of identifying margin expansion and efficiency that the U.S. mobile connectivity leadership that Qualcomm can significantly be attributed to, would be in danger.
President Trump ultimately vetoed the deal for national security reasons. Still, the heavy R&D investment of Qualcomm and long product development horizon would have posed significant challenges to Broadcom’s approach to acquisition integration. I see similarities with SAS, albeit more in the high-touch client relationships and likely higher cost of sales for SAS.
Other potential suitors
Microsoft /zigman2/quotes/207732364/composite MSFT +0.13% , Amazon’s /zigman2/quotes/210331248/composite AMZN +0.36% AWS and IBM /zigman2/quotes/203856914/composite IBM -0.56% are three names that I think make significantly more sense for SAS, its employees and its customers.
However, for Broadcom, the deal is probably worth doing. SAS has more than 83,000 customers in business, government and university, and its solutions are global, reaching more than 147 countries. With SAS in its portfolio, Broadcom’s software efforts would deepen in critical markets, including automotive, retail, financial services and health care. All of which cross over well with the CA and Symantec.
While the deal is still speculative, I wouldn’t be surprised to see a formal announcement follow soon. It will be interesting to see if other potential suitors, including those I named above, could enter the fray now that it is clear SAS is considering a sale. Either way, SAS’s days as a private company appear to be numbered, and if Broadcom wins out in the end, it’s a good move for the company, which wants to be taken seriously as a software player.
<EMPHASIS>Daniel Newman is the principal analyst at </EMPHASIS>Futurum Research<EMPHASIS>, which provides or has provided research, analysis, advising, and/or consulting to Nvidia, Qualcomm, Microsoft, Amazon and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter <INTERNET LOCATION="EXTERNAL" URL="https://twitter.com/danielnewmanuv">@danielnewmanUV</INTERNET></EMPHASIS> .