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Symantec CEO’s Ouster Intensifies Pressure: Real M&A

Symantec CEO’s Ouster Intensifies Pressure to Break Up
Enrique Salem, chief executive officer of Symantec Corp., stands for a photograph prior to a Bloomberg West television interview in San Francisco. Photographer: David Paul Morris/Bloomberg

Symantec Corp., which ousted Chief Executive Officer Enrique Salem after the stock underperformed for years, could deliver a 40 percent gain to shareholders by splitting its security software and storage businesses.

After more than $3 billion in value was erased in the past year, shares of the Mountain View, California-based company trade for a lower multiple relative to earnings than 90 percent of similar-sized peers globally, according to data compiled by Bloomberg. Since creating its storage division through the 2005 purchase of Veritas Software Corp., the $11.1 billion corporation has fallen 26 percent, worse than every rival in the infrastructure-software industry, the data show.

Symantec would catapult its value to between $22 and $28 a share, from $15.75 yesterday, by unraveling the $13 billion Veritas deal through a breakup, according to Royal Bank of Canada and Lazard Capital Markets LLC. The stock has risen 20 percent since Salem’s replacement by Chairman Steve Bennett last week, and investors are growing convinced Symantec will take action, said shareholder Cambiar Investors LLC. International Business Machines Corp. and Oracle Corp. are among potential buyers for all or part of the company, according to Argus Research Corp. and Stifel Financial Corp.

“There’s a palpable expectation in the marketplace that they are going to do something,” said Brian Barish, who oversees $7 billion as president and chief investment officer of Denver-based Cambiar. He said the firm owns 11 million Symantec shares. “They have a lot of options. The most obvious one would be to split off the storage business from the security business.”

Norton Antivirus

Nicole Kenyon, a spokeswoman for Symantec, said the company doesn’t comment on rumors or speculation, when asked if it was considering a breakup.

Symantec, known for its Norton antivirus products, also offers data-storage and backup services because of the Veritas purchase. Since that deal closed in 2005, Symantec shares have dropped while the median company in its peer group rose 116 percent, data compiled by Bloomberg show. The company’s sales growth slowed to 8.7 percent during the fiscal year that ended in March from 60 percent in fiscal 2006.

The board removed Salem last week, saying the company wasn’t performing well enough. The shares had fallen 19 percent since he took the CEO job in April 2009. The new chief, Bennett, said last week on a conference call that he plans to spend 90 to 120 days meeting investors, customers, partners and employees to decide on the direction the business should take.

“I took this job because I believe our assets are better than our performance, and I need to find what’s getting in the way,” he said.

Stalling Growth

Growth at the company’s storage and server-management division, which generated $2.41 billion in sales last year, has stagnated. After revenue jumped 21 percent in fiscal 2008, annual increases averaged 1.3 percent, according to data compiled by Bloomberg from regulatory filings. The unit’s operating profit decreased 8.1 percent to $977 million last year, and its market share slid to 15.8 percent in 2011 from 17.8 percent in 2009, according to International Data Corp.

The consumer-products group, which had fiscal 2012 sales of $2.1 billion, saw its operating income rise 13 percent last year.

“All of those businesses are separate, and they’ve never really done a full integration of any of them,” Joel Fishbein, a New York-based analyst for Lazard, said in a telephone interview. “The businesses that are underperforming are dragging down the businesses of the good company.”

Valuation Jumps

Symantec’s shares closed at $13.18 the day before Salem’s replacement as CEO was announced, valuing the company at 11.2 times profit. That was the lowest price-earnings ratio since December 2008, or less than four months before he took the job, data compiled by Bloomberg show.

Following the biggest five-day rally since November 2008, the shares now fetch 13.4 times earnings. That’s still the fourth-lowest valuation among infrastructure software companies bigger than $1 billion, and trails the group median of 28.

“It’s a cheap asset,” Israel Hernandez, a San Francisco-based managing director at MKM Partners LLC, said in a phone interview. “They are one of the most inexpensive software companies. Relative to peers, I think it’s undervalued.”

Today, Symantec rose 1.7 percent to a three-month high of $16.01. The stock posted the second-biggest gain among technology companies in the Standard & Poor’s 500 Index.

Limiting Growth

Robert Breza, an analyst at RBC, said in a report last week that splitting the security and data-storage businesses would create entities with a total value of $28 a share. Fishbein sees the broken-up company valued at $22 to $25 a share. Symantec’s data-storage unit could fetch as much as $5 billion in a sale, he said. Fishbein values the consumer-security business, which includes Norton antivirus products, at about $8 billion and the rest of the company at about $4 billion.

Frederick Ziegel, a New York-based analyst for Topeka Capital Markets Inc., said the company could focus on the security business and sell the storage business for as much as $7 billion “to eliminate the businesses that are a drag on their overall growth.”

Oracle and IBM may be interested in that division to expand their own storage businesses, according to Todd Weller, a Baltimore-based analyst at Stifel. He said Dell Inc. might consider buying the security business, following Intel Corp.’s acquisition last year of McAfee Inc., another developer of antivirus software.

Private Equity

Joseph Bonner, a New York-based analyst at Argus, said IBM and Oracle could also be interested in taking over all of Symantec, while Lazard’s Fishbein said the company’s cash generation could attract a private-equity buyer. Symantec has a free-cash-flow yield of 12.4 percent, the second highest among peers, data compiled by Bloomberg show.

Deborah Hellinger, a spokeswoman for Oracle, declined to comment. So did IBM’s Ed Barbini and Dell’s David Frink.

While a breakup may unlock value for shareholders, connections between Symantec’s business segments may be too difficult to unwind, said Steve Ashley, a Milwaukee-based analyst for Robert W. Baird & Co. He cited shared sales forces and technology.

Divesting the data-storage business may help Symantec focus on growing the rest of the company, according to Richard Williams, an analyst for Cross Research in Livingston, New Jersey. Still, it may be too difficult to part with the revenue that unit generates, he said.

“There’s a lot of good stuff inside Symantec, but there’s also some challenging businesses that are too big or too important to get rid of,” he said in a phone interview.

While restructuring the business may take work, focusing on one product could make Symantec more profitable, MKM Partners’ Hernandez said. Brian Freed of Wunderlich Securities Inc. agrees that streamlining is necessary.

“There was always this hope and promise that storage and security would converge, and it really hasn’t,” said Freed, an analyst at Wunderlich. “Since there are no synergies, a singular focus yields better results.”

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