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Symantec: From Stumble to Stagger?

In early 2005, Symantec's (SYMC) feisty chief executive, John Thompson, had a lot of explaining to do. Shareholders and Wall Street analysts were scratching their heads over his plan to merge Symantec, the biggest security-software maker, with Veritas, the leader in a very different market: data-storage software.

An exasperated Thompson crisscrossed the country to sell his vision of a company that could provide one-stop information security, storage, and retrieval. "Information integrity," he called it (see BW Online, 03/14/05, "Symantec Defends the Veritas Deal").

His sell got tougher still as Microsoft's (MSFT) Bill Gates revealed in February that his company would launch competing antivirus software by the end of 2005. Could Symantec pull off the largest merger in the history of software -- all the while defending its home turf against the world's largest software maker? Thompson was defiant, even outraged.

"What Wall Street doesn't seem to recognize is, candidly, this is a leadership team that has, in fact, redefined this company and delivered on every quarter except one for the last six years," he said in an interview with BusinessWeek last February. "And I'm surprised all of the sudden they're unwilling to give us credit for what we've done. More importantly, credit for our capability to do it again." (See BW Online, 02/16/05, "Symantec's Thompson: `I Can't Wait to Compete…' ").

RIVALS' OPPORTUNITIES. As it turned out, shareholders were right to be wary -- and now they're the ones showing frustration. Cupertino (Calif.)-based Symantec on Nov. 1 reported less-than-stellar second-quarter results -- the first full quarter with both companies under the same roof. It had a loss of 21 cents a share, owing to write-offs associated with the Veritas deal.

Sales, including some deferred revenue, rose 8%, to $1.19 billion. It was the company's reduced sales forecast for fiscal 2006 that spurred investors' worries. Revenue will come in at about $5 billion, about $130 million less than Symantec previously expected.

As Symantec executives strove to knit the two disparate businesses together, key consumer products were delayed and competitors made hay. Symantec saw pricing pressure from business customers for the first time. And a newly restructured McAfee (MFE) is making deep inroads into Symantec's lucrative consumer antivirus business (see BW Online, 05/31/05, "McAfee Isn't Insecure Anymore").

On the earnings call Nov. 1, Thompson was up-front about the role the merger played in these developments. "I think what we have here is perhaps a set of opportunistic moves, given all of what we were trying to get done," he said, specifically of pricing pressure from business customers. "I take this as a shot across the bow. We'll get a hell of a lot more aggressive this quarter, and I would expect this business to turn on the dime."

KEY DEPARTURES. Merger distractions weren't the only cause for concern. Symantec lost another key member of the management team that Thompson defended so vociferously back in February: CFO Greg Myers resigned. What's worse is how the company disclosed the departure: no mention in the earnings press release.

And it didn't come up on the conference call until after the question-and-answer period, when the operator turned the call back to Thompson for some parting words and some analysts had already disconnected. "I and the rest of Wall Street had already hung up," says Gene Munster of Piper Jaffray. "I had a call with Myers after that, and he didn't even mention it."

Myers' resignation follows the September departure of COO and President John Schwarz, who left to run business-intelligence company Business Objects (BOBJ). The executives are well regarded, and analysts and investors consider their departure a blow to Symantec. On Nov. 2, Symantec's shares plunged nearly 20%, closing at $19.37. And seven analysts cut ratings on the stock.

QUESTIONABLE CALL. Munster, like many, heaped praise on Symantec just a few quarters ago. Now he fears the outfit will repeat the fate of Checkpoint Systems (CKP): generating lots of cash but suffering from dwindling growth.

What has gone wrong? The easy answer is to blame the merger. It's a big, complicated deal that pulls Symantec's focus from pure security -- where it has performed well in sales -- to consumers, small businesses, and big companies.

Thompson tried to strike a more even balance between the enterprise and consumer spheres. That's looking like a questionable call, now that businesses are unexpectedly pushing back on price.

FIRE IN THE BELLY? Adding to the challenge, McAfee is stepping up its efforts in the consumer market. Symantec recently pulled out of deals with Gateway (GTW) and Dell (DELL) that would put its popular Norton antivirus software on every machine for free, instead opting to be the premium pay-for brand, according to Munster. But McAfee jumped at the chance, even though it could mean commoditizing its own software.

McAfree has also signed distribution deals with major Internet service providers such as America Online (TWX), Comcast (CMCSA), and MSN. Even at retail, McAfee has made inroads, thanks to Symantec's delay in launching its core Norton AntiVirus suite of products. Thompson was confident the Norton brand would regain that lost ground by introducing more innovative protection offerings beyond basic antivirus software.

Symantec still owns the security market -- for now. It's cash-rich and has what some observers consider one of the top CEOs in the business. A question on the minds of some analysts: How hungry is Thompson?

GROWING DOUBTS. Munster speculates that executives such as Myers and Schwarz made a lot of money at Symantec and weren't given enough incentive to stick around and fix a "broken" company.

As the executives who helped champion the merger leave, it gets harder to keep that "information integrity" vision alive. And, at least to Wall Street, that $10.25 billion deal is looking more costly all the time.


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