Broadcom tells Wall Street it will focus on acquiring software companies, a year after the Trump administration squelched its $117 billion Qualcomm acquisition

• Semiconductor giant Broadcom grabbed headlines last year during its $117 billion hostile takeover bid for Qualcomm. Now the company is turning away from semiconductor acquisitions.
• In a conversation with Morgan Stanley, Broadcom Chief Financial Officer Tom Krause said that the remaining independent semiconductor companies are too expensive, which makes it unlikely that any deals will get done.
• Krause told Morgan Stanley that Broadcom management has its eyes on the infrastructure software space, which includes companies like CA Technologies, which Broadcom acquired for $19 billion last July.
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It's been sixteen months since President Donald Trump intervened to prevent Broadcom's $117 billion takeover bid for Qualcomm, its competitor in the semiconductor space.

Now Broadcom has shifted its M&A strategy away from semiconductor consolidation and into the software sector, citing concerns that there aren't enough cheap semiconductor companies left to acquire.

In a conversation with analysts at Morgan Stanley, Broadcom Chief Financial Officer Tom Krause said management thinks that the infrastructure software space is ripe for the type of consolidation that started shrinking the semiconductor landscape five years ago.

Morgan Stanley analyst Craig Hettenbach shared his takeaways from the conversation with Krause in a note to investors on Monday.

Read more: The president of $85 billion Qualcomm explains his master plan for growth, 4 months after Trump blocked its takeover by Broadcom

Broadcom already took a major step into the software sector last July, when it acquired CA Technologies for $19 billion. That investment is already nearing a 14% return, according to the note.

While investors have shared their concerns that the mainframe software market, where CA Technologies sits, is shrinking, Hettenbach said Broadcom isn't worried.

Broadcom's management team believes that there's a place for infrastructure software in hybrid cloud implementations, Hettenbach wrote. In hybrid clouds, customers use combinations of on-premise and public cloud services to power their computing infrastructure.

Broadcom isn't the only acquirer to take a step back from semiconductors. Consolidation in the chip space has slowed in recent months as global trade tensions have put a hold on many cross-border deals, including Broadcom's hostile takeover bid for Qualcomm last year.

Broadcom relocated its headquarters to San Jose, California from Singapore as part of an effort to ease cross-border concerns. Its relocation was finalized in April 2018, just weeks after the Trump administration blocked the Qualcomm takeover, citing national security concerns.

Krause told Morgan Stanley that the remaining independent semiconductor companies are too expensive, which lowers the chances of getting deals done.

"In semiconductors, [Broadcom] was early and led the wave of consolidation seen across the industry," Hettenbach wrote. "However, with many assets already off the board and remaining companies trading at high valuation multiples, the opportunity set in semis is much lower today."

However, Hettenbach emphasized that he expects Broadcom will ultimately make acquisition decisions based off of what makes the most sense financially.

"First and foremost, Broadcom's approach to M&A is to deliver high cash on cash returns, which it has been quite successful in achieving to date," he wrote.