Even Donald Trump can’t stop Hock Tan from buying and cutting up big companies. After a conflict with the U.S. President over Qualcomm, Broadcom bid $10.7 billion in cash for Symantec, its third acquisition in an effort to grow a franchise in business software.

The deal has all the hallmarks of Tan’s past acquisitions. A mature but troubled company is acquired. Its sales force, expenses and R&D budgets are significantly cut to focus on a few core products sold often at lower prices to undercut rivals.

The formula worked with the 2013 acquisition of LSI and the 2015 merger of Avago and Broadcom. After Trump prevented Tan from buying Qualcomm, the Broadcom chief executive shifted his strategy. Now Broadcom aims to expand its market from only selling chips to OEMs to also selling critical software to a larger base of end users.

Acquisitions of Brocade in 2016 and CA Technologies followed a similar pattern as earlier deals, but created a new portfolio of software Tan aims to grow to about $7 billion, or 29% of Broadcom’s estimated $24.6 billion annual revenues. Broadcom expects to make $5 billion in its current fiscal year selling Brocade and CA software.

text

The Broadcom M&A formula may continue to find software targets.

Once the new deal closes, Broadcom aims to cut $1 billion in Symantec’s expenses within a year, $650 million of them by layoffs among its sales force. The rest of the cuts will be from general expenses and focusing R&D on three core products — end-point security, secure Web gateways and data loss prevention that generate annual revenues $550, $700 and $450 million respectively.

The three businesses have leading market share against a range of small and large competitors that include McAfee, ZScaler, Cisco, Microsoft and Oracle. The $2 billion estimated revenues Symantec will bring are a drop in the bucket of an estimated $160 billion annual cybersecurity market.

Tan sees business software as a stable complement to Broadcom’s more volatile chip business. Sales focus on the mainstream products for top IT spenders that Tan calls the Global 2000.

“One CIO told me 80% of his spending is on core infrastructure that runs his business,” Tan said.

“Those are very embedded apps that do not change easily — they are proven, trusted and they work…They may not grow in double digits but they grow as enterprises grow…That fits the Broadcom model of sustainable revenues,” he said.

“The 20% are advanced features the world seems to look at…but the 20% is not in the least sticky,” he added on a conference call.

Tan countered one financial analyst who asserted Symantec’s business is declining. “We think it will grow with our focus on the G2000 and the combination with our other products, but the proof of the pudding is in the eating,” he said.

Tan noted analysts also characterized the Brocade business tied to Fibre Channel networks as declining. However, he said it has grown nearly to a billion-dollar unit in EBITA accounting terms. Likewise, Broadcom is seeing about 8% growth in its CA software revenues, he added.

The Symantec deal is expected to close in Broadcom’s first 2020 fiscal quarter. It requires approvals from U.S. and European regulators, but not China.

Broadcom aims to continue returning 50% of its free cash flow to shareholders in dividends. However, it expects to shift from stock buy-backs to paying down debt to maintain its investment rating, the company’s CFO said.

Broadcom’s guidance of $22.5 billion in revenues from its fiscal 2019 remain unchanged. It’s earlier report that the U.S./China trade war has shaved $1 billion off its expectations due to a decline in demand also remains unchanged, however it has not seen conditions deteriorate further, the CFO said.

Symantec stumbled in May when it missed quarterly sales and profit projections. Its CEO was replaced and former Novellus CEO Richard Hill, who also took over Marvell after its founders left, stepped in at Symantec as an interim leader.

Tan sidestepped one analyst's question about synergies between Symantec's software security business and any future Broadcom security chips. Under former Intel CEO Paul Otellini acquired McAfee, but his successor Brian Krzanich sold it off as a non-core business.

text

The company’s major acquisitions to date.