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Broadcom Inc. execs say they're confident in their plans to integrate their CA Technologies acquisition, but the company must execute on its proposed strategies to stay in the good graces of CA's mainframe software customers.
Analysts still ponder the Broadcom-CA deal, which was disclosed last July. Why would a prominent chipmaker like Broadcom spend $18.9 billion for a 40-year-old software company known for proprietary mainframe technologies? Such an investment appeared particularly unwise, as CA reinvents itself through development and acquisition of cloud- and open-source-based offerings.
"It's really, really hard to reposition a company like CA, especially going into a market for cloud and cloud management that is heavily populated with a lot of heavy hitters," said Judith Hurwitz, president and CEO of Hurwitz & Associates Inc., consultants in Needham, Mass.
But Broadcom executives saw links in the CA acquisition. They saw an overlap of their common corporate customers, as well as possible ways to mix and match portfolios for their largest accounts. For instance, they could meld CA's security or network management software offerings with Broadcom's router and switching hardware for networks and mainframes in telecommunications companies where both vendors have a strong presence.
"Broadcom is in a lot of enterprise data centers ... [I'm] just looking at Brocade [which Broadcom acquired in late 2017] and the amount of networking gear that works with mainframes," said Greg Lotko, senior vice president and general manager of Broadcom's mainframe division.
Lotko said he believed if Broadcom had a product that tied together these technologies, then it would reach the same buyers in these organizations, and they might take advantage of each other's portfolio.
Divergent sales cultures shadow Broadcom-CA acquisition
One criticism leveled at Broadcom is the company's reliance on OEMs to sell its products face-to-face with IT professionals is a disadvantage against mainframe software competitors, and it will require Broadcom to invest even more.
"The core Broadcom sales and marketing teams will need to understand selling software is different from selling hardware," said Stephen Elliot, vice president of IT infrastructure and cloud practice at market research firm IDC. "Effective cross-selling [is] a critical success factor for Broadcom as a company."
Broadcom also must ensure CA's sales relationships and customer councils not only remain intact, but are cemented, which will require further investments, Elliot added.
Increasingly, however, Broadcom deals directly with large corporate accounts that run their own data centers, and these customers are confident they can better customize those operations, said Ashok Reddy, senior vice president and general manager of Broadcom's enterprise software division.
"More large companies tell us, 'Why do I have to depend on someone else when I can build a better private cloud myself?'" Reddy said. "We can help them install it all the way from the silicon to the top of the software stack."
Broadcom has some time to win the confidence of CA's core mainframe base, but it's not a free pass. If corporate users sense that Broadcom has backed away from its commitment to mainframe software, it might turn to CA's competitors.
"The next 24 months will be critical as contract renewal cycles come up, because those margins are pretty important," Elliot said. "It might take that long to determine if this was the right deal to make from a financial standpoint."
To entice those corporate users, Broadcom thinks its portfolio licensing agreement program is a more modern and flexible way to buy and license software than the traditional two- and three-year lock-in licenses. Users can access and license online any combination of products from across Broadcom's portfolio for either cloud or on-premises environments, much like an app store, Reddy said. Users can cancel out of the agreement at any time, with a convenience fee.
Broadcom's commitment to CA under scrutiny
Some industry watchers question Broadcom's commitment to CA's core products because of Broadcom's aggressive acquisition history. Broadcom CEO Hock Tan has targeted profitable companies, streamlined their operations and, in some cases, sold those companies and turned a profit for Broadcom and its shareholders.
"[Hock Tan] targets very specific market segments, thinks about how to streamline operations and drives the right staffing levels from a Wall Street numbers perspective, balancing that with customer focus," Elliot said. "He has made it clear he loves high operating margins."
In November, Broadcom sold off Veracode, whose products secure web and mobile applications that CA purchased in March 2017, to private equity firm Thoma Bravo for a $336 million profit. Veracode didn't fit as neatly into Broadcom's long-term plans as CA's other cloud-based offerings, Reddy said.
Broadcom pushes back on the notion its CA acquisition plan is to milk the company's mainframe software profits and eventually sell it if revenue and profits slide. Despite the Veracode sale, Broadcom plans to invest aggressively in CA's products and human resources this year and is in the mainframe software business for the long haul.
Greg Lotkosenior vice president and general manager of Broadcom's mainframe division
The first manifestation of this investment is a worldwide tour of 30 Broadcom-sponsored events, where company executives meet with mainframe software users and get their feedback on what they expect and need from the newly combined company over the next year.
Broadcom will hire employees dedicated to current and future mainframe-related products and keep its existing portfolio technologically up to date with IBM's latest platform, Lotko added.
In an analyst call last month, Tan said he would not seek out new mainframe customers and instead focus on just serving CA's existing mainframe base. However, that shouldn't be construed as the company lessening its commitment to that market, Lotko said.
"Can we grow the number of mainframe customers in the world by 10% to 15%? No, we cannot," Lotko said. "We will get a lot further by helping existing users be more effective by consolidating their environments, driving more throughput and making them more secure."
Despite assurances from company executives, some analysts remain unconvinced that Broadcom can successfully integrate its core businesses with those of CA or keep a long-term commitment to the business.
"Broadcom is a chip company that failed at acquiring Qualcomm and is pivoting to mainframe software," said Patrick Moorhead, president and principal analyst with Moor Insights & Strategy in Austin, Texas.
"Few understand what is going on there," he added. "I can only surmise it wants to act like a corporate raider, buying distressed and undervalued assets and selling off the piece parts. There is no holistic strategy that ties any of these pieces together."