Snapping up highly cash-generative companies with little or no debt is not just the preserve of private equity funds. Broadcom, one of the world’s biggest chipmakers by market value, has followed this playbook for years — first, to consolidate the semiconductor sector and then, more recently, the software industry.
It bought ageing software group CA Technologies and Symantec’s enterprise security business in quick succession between 2018 and 2019. It is now reportedly closing in on privately held analytics group SAS Institute in a deal that could give the North Carolina-based company an enterprise value of as much as $20bn.
Culturally, the two groups make for an odd fit. SAS co-founder and longtime chief executive Jim Goodnight is famous for building a nurturing work culture. He had refused to take the company public in the past and eschewed furloughs or lay-offs last year in response to the pandemic. This is about as far away from Broadcom’s slash and burn approach as it gets.
It may also be why SAS, as a business, looks ripe for PE-style restructuring. Growth has stalled in recent years, with annual revenue stuck around the $3bn mark. But much of these are sticky, recurring revenues. More than 82,000 businesses, governments and universities around the world rely on SAS’s software. Steady profits every year since it was founded in 1976 and no debt might attract bids from other PE groups.
Broadcom chief executive Hock Tan’s decision to expand into software came after his hostile bid for Qualcomm was blocked by regulators. So far, his pivot has worked. Software accounted for 28 per cent of Broadcom’s revenue last year. Revenues and profits have jumped, lifting its market value to a record of nearly $200bn — double that of last March’s low. Nevertheless, it gets harder to identify Broadcom’s organic growth with each passing year.
Broadcom switched to software acquisitions after it ran out of targets in semiconductors. That pivot has worked; the next one may be less successful. Growth by acquisition has only a limited lifespan.