President Donald Trump smiles at Broadcom CEO Hock Tan during an event to announce that the company is moving its global headquarters to the United States, in the Oval Office of the White House, Thursday, Nov. 2, 2017, in Washington. The White House says Broadcom, a $100 billion semiconductor company based in Singapore, will move its home address to the U.S. (AP Photo/Evan Vucci)
Broadcom chief Hock Tan with US president Donald Trump in 2017. Mr Tan could be the most serious consolidator in software since Oracle’s Larry Ellison © AP

Is Wall Street ready for a tech roll-up conglomerate?

Anyone who didn’t think that Hock Tan, head of the acquisitive US chip company Broadcom, was serious about creating a new type of beast in the tech jungle — one that feeds on many different types of prey — needs to think again.

He already gorged on software once with the $18.9bn purchase of mainframe software company CA last year. Many investors weren’t convinced he could apply management techniques honed in semiconductors to an entirely new field.

Now Broadcom is circling struggling security software concern Symantec. It no longer looks so far-fetched to think of Mr Tan as the most serious consolidator in software since Oracle’s Larry Ellison almost 20 years ago.

His plan is to apply the same operational focus and ferocious attention to costs that put Broadcom at the top of the chip world to an entirely new sector. But can this approach work in a tech conglomerate form?

Private equity-style management in the service of corporate empire-building is not entirely new in tech. Michael Dell has been at it for several years, with the backing of PE firm Silver Lake (which also backed Mr Tan as he cut a swath through the semiconductor world, although their partnership came to an end when the Broadcom boss turned trained his sights on software).

There are important differences, though. Mr Dell’s hardware, software and services play is a familiar construct in the enterprise technology business. His innovation has been of the financial kind, using large amounts of debt and a controversial tracking stock to put the pieces together.

Nor is Mr Tan motivated by the kind of big-picture thinking that led to an earlier chips-plus-software combination: Intel’s purchase of another well-known antivirus company, McAfee. The grand idea behind that deal — that McAfee’s expertise would somehow help Intel bake stronger security into future generations of its chips — was never borne out, and the deal was later unwound.

What Mr Tan has in mind instead is the kind of conglomerate idea that once animated companies such as General Electric: hone a management discipline and culture that can be applied equally effectively to unrelated businesses living under the same corporate umbrella.

That stands in stark contrast to the thinking at many other tech companies that have expanded through acquisition, particularly as they stray from their core markets in pursuit of the kind of “integrated solutions” they claim tech customers want to buy.

CA, for instance, diversified away from mainframe software, arguing that customers would benefit from a single supplier of products that “span their entire infrastructure stack, across mobile, cloud, distributed and mainframe”.

That rhetoric was used to justify a business that, in its last full year, produced an operating profit margin of 64 per cent in the mainframe half of its business — and only 9 per cent in the “enterprise solutions” half.

Mr Tan’s answer: strip CA back to its mainframe roots, serving a narrower market of big customers. He reckons he can cut fully 60 per cent out of its costs and lift its operating income from $1.1bn to $2.5bn in two or three years from now.

Something similar seems to be in store for Symantec, should it accede to a Broadcom offer. The security company boasts in its official filings of combining “Best-of-breed technology with unmatched scale to deliver a comprehensive cyber security set of solutions” — just the type of woolly rhetoric beloved of tech companies that have strayed widely. 

Symantec has a gross profit margin of almost 80 per cent, but its operating margin is a paltry 8 per cent. The biggest line item in its costs is the third of revenue it spends on sales and marketing, even though its growth has stalled. For a manager such as Mr Tan, that is a red rag to a bull.

There are some obvious advantages to this new type of tech conglomerate. The chip industry is notoriously cyclical, making the annuity-like income that comes from software an ideal complement.

But as with all conglomerates, there are potential weaknesses inherent in the form. How far, for instance, will Broadcom seek to find “synergy” between its widening array of tech businesses? Can it do this without detracting from the extreme focus on individual businesses that is Mr Tan’s main strength?

Also, as Broadcom’s range widens, can it develop the new processes and skills needed to manage an increasingly complex group? Doing that effectively will mean developing a cadre of managers who can take the Broadcom way of doing things into many unrelated businesses, as GE did in its heyday.

The shortcomings of Broadcom’s growing complexity are already becoming apparent. With the CA acquisition, it stopped breaking out the performance of its chip operations into four different segments, to the chagrin of many investors. Instead, it now lumps them all together under the banner of “semiconductor solutions”.

Mr Tan may still have a close eye on each of his businesses, but Wall Street can no longer say the same. As a taste of what’s to come, it looks like a small but ominous sign.

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