I see this buy as a follow-up to the CA buy because of one big thing:
free cash flow.
If Wedbush and Oppenheimer are to be believed, this deal would go down valuing Symantec in the $15 billion - $20 billion range, so I'll use $17.5 billion as a starting point. Symantec has stable free cash flow around $1.2 billion, so Broadcom is looking at buying cash flow of roughly 7% per year (free-cash-flow divided by purchase price). Broadcom then takes that cash to buy back its own shares and pay a dividend to shareholders.
Obviously, it can use it to
pay down debt as well and any debt below 7% essentially creates "free" money on the difference between the rate on the debt and 7%. We know it isn't truly free. There's risk involved in this deal, but Symantec would only equal about 10% of Broadcom's current market cap, so it has a reasonable limit.
In terms of upside, Symantec's consumer business, about half its revenue, is also stable despite facing heightened competition. I suspect the
cost-cutting consolidation that we'd see on SG&A would be enough to maintain or even improve that stability. But it is the struggling enterprise business that could benefit from the merger.
Broadcom could fit the software (networking, cloud, and endpoint security) aspects of Symantec into its recent CA purchase for cross-selling and upselling. Add in some c
ost cuts here through the elimination of redundancy and that's where you'll find the upside potential.
If it wasn't clear before, Broadcom has shifted its focus away from the hardware side of the business in terms of acquisitions.
realmoney.thestreet.com