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Suddenly Insecure About Symantec

By Sarah Lacy Just a few months ago, Symantec was a Wall Street darling. But a combination of investor fears that Microsoft (MSFT) is about to jump into Symantec's (SYMC) security-software business and uneasiness with its planned $13.5 billion merger with storage-software maker Veritas Software (VRTS) has hit hard. Symantec's share price is down about 25% over the last four weeks, closing at $24.50 on Jan. 19.

That has to hurt, considering how well the Silicon Valley stalwart is doing. After the market closed on Jan. 19, it announced that sales for the fiscal quarter that ended in December were $695 million, a 41% increase over the same quarter a year ago. This handily beat Wall Street's expectations of $665 million. Net income was $164 million, up 38% from a year ago.

Given the most recent quarter's strong sales, Symantec execs say they plan to take a second look at their estimates for 18% annual growth for Symantec and Veritas after the merger happens sometime in the spring. Until then, however, they won't provide more details.

"TOUGH SELL." A deeper look at Symantec's most recent quarter shows strong double-digit gains across nearly all business lines and regions. Deals with big companies were up, too, with Symantec closing 25 seven-figure buys -- twice the number from a year ago. "It looks solid every which way," says Nitsan Hargil, senior technology analyst at Friedman, Billings Ramsey & Co. in New York.

Hargil is bullish on Symantec stock, maintaining an outperform rating and $28 price target. But even he isn't sold on the Veritas merger, wishing Symantec had focused on dominating security instead of saddling itself with the considerable task of integrating a company of similar size in the very different storage-software market. "I will buy the vision years from now when the market is more ready to accept an integrated solution," he says. "Until then, it will be a tough sell."

That's the problem. Investors are having a hard time understanding how the companies can be effectively combined. "Symantec has an especially cultish investor base, and many are disappointed by the acquisition and are looking for alternatives," says Hargil.

ENTER MICROSOFT. Once the deal is finalized, investors will watch closely to see how well the two companies' sales forces hawk one another's products, Hargil says. Until then, expect more share-price uncertainty, Hargil and other analysts say, even if the March quarter turns out as well as the last one.

CEO John Thompson didn't say much about the Veritas deal in a conference call with analysts, other than to report that Veritas Chief Financial Officer Edwin Gillis had met with Symantec's board, and Thompson has had several meetings with Veritas' sales force.

Most analysts are less concerned about Microsoft in the near term, since they believe it will take a year or two for the Redmond (Wash.) software giant to prove a real threat to Symantec. The first battle will be in software to protect against spyware, which can track Web surfers' activities and steal passwords and financial information. Microsoft has already released a test version of its antispyware software, and Symantec should release both consumer and commercial versions of its program later this quarter.

READY TO RUMBLE. When asked about Microsoft, Thompson struck a defiant tone, saying the giant won't be competing anytime soon -- and that Symantec is ready to take it on when that happens. "As their marketing machine continues to make noise in the marketplace, we'll continue to make revenues," he says.

Thompson added that the strong quarter proved "our resolve not to let things interfere with our performance, even things we do to ourselves." No doubt, that's a plea for investors to trust a management team that has posted solid growth for three consecutive years. Too bad for Thompson & Co., investors seem low on trust. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau

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