On Thursday, chipmaker Broadcom announced it would purchase software developer Symantec’s enterprise segment for $10.7 billion. The two firms plotted a merger last month, but plans fell apart when they couldn’t agree on a price. The San Jose, California-based manufacturer expects its new acquisition to generate $2 billion in revenue annually.
Pending regulatory approval, Broadcom expects to close its acquisition of Symantec’s business division by the fiscal first quarter of 2020. Broadcom CEO Hock Tan said the purchase represents “the next logical step” in his strategy to increase the firm’s software holdings. In 2018, the chipmaker spent $19 billion to acquire enterprise software maker CA Technologies.
The corporation intends to use its existing marketing resources to sell enterprise utility software to its existing customer base. In the long term, Broadcom expects its subsidiary to turn to billion dollars every year. Moreover, the firm forecasts saving $1 billion in “run-rate cost synergies” within 12 months.
Symantec indicated it would use the sale of its enterprise business to refocus on its consumer products, like LifeLock identity protection and Norton antivirus software. The firm also announced plans to distribute Broadcom’s cash injection ($8.2 billion after taxes) to its shareholders via a special dividend. Furthermore, the company said it will spend $100 million closing now redundant facilities and will cut staffing by seven percent.
How Broadcom Benefits from Buying Symantec
Hock Tan predicted his company would earn $24.5 billion in the 2019 fiscal year. However, in June the executive revised its forecast down by $2 billion because of the effects of the U.S.-China trade war.
Indeed, for this year the firm made 4.2 percent of its income by selling chips to Huawei. However, the firm ended that relationship in May after the federal government forbade U.S. businesses from trading with the Sino conglomerate. Broadcom’s acquisition of Symantec’s enterprise segment will help the corporation protect its finances regardless of international commerce fluctuations.
However, Broadcom gains more than a tariff exempt revenue stream by buying Symantec’s business offerings. After production costs, the developer had an 83 percent profit margin on its software. Though Bloomberg predicts Broadcom’s post-acquisition margin will fall to 73 percent, it’ll still be more profitable than its semiconductors.
Presently, Broadcom derives 77.7 percent of its income from hardware sales. But with its new purchase, the corporation will have a more diversified business model. In the current component market, Tan’s decision to expand the firm’s offerings is a sagacious move.