Thoughts on the Symantec/Veritas merger

Steve Hamm

What’s going to become of the Symantec-Veritas deal? It seems like a smart combo to me, but investors are bailing out of both company’s stock.

I think the negative reaction came as a surprise to Symantec CEO John Thompson and Veritas chief Gary Bloom. When they announced their proposed $13 billion merger on Dec. 16, they thought they had a good thing going. The idea was that by matching up the leading computer and network security company (Symantec) with the leading independent storage management company (Veritas), they’d be able to offer corporations a comprehensive set of solutions for safeguarding and managing their information. There’s logic in it.

But their investors hated the deal—especially Symantec’s. Since news of deal leaked, they have pushed down it stock price more than 25%, from 33 to 24. Meanwhile, Veritas’ stock slid from 28 to 26.

This explains why Symantec has been campaigning hard with investors to try to win them over. Thompson conducted meetings with investors and analysts on Jan. 5, 7, and 11 that were also Webcast to the masses.

It’s possible that what’s going on here is a painful but necessary shift in Symantec’s investor base. A lot of the investors in the stock pre-merger announcement were focusing on the company’s 25% plus revenue growth—a lot of which was being juiced by its consumer anti-virus products business. It’s not surprising that they’d be sour on a merger that takes Symantec ever deeper into the slower-growth (but potentially very profitable) enterprise software business. If Symantec and Veritas succeed at their attempt to win over Wall Street, the new buyers will be investors interested in being in a company with a broad enterprise product line—in the style of SAP, Oracle, or Computer Associates.

If you look at Symantec that way, it stacks up pretty well. It would be the fourth-largest software company in the world with an estimated $5 billion in revenues and a growth rate of in fiscal 2006 of 18%. That would make it by far the fastest-growing software company with more than $3 billion in revenues.

The other thing to remember about Symantec is that continuation of its rapid antivirus revenue growth is anything but assured. Its booming sales over the past three years resulted from a near-panic among consumers about viruses, and that blistering pace can’t continue. The other factor: Microsoft. It has signaled its intentions of getting into the anti-virus software business, which would very likely take a chunk of market share from Symantec over time.

Just look at how jumpy the markets are about Microsoft’s plans. After the software giant announced a beta for a spyware product and a new virus removal product on Jan. 6, as described in this article, Symantec’s stock price dipped a couple of points. (I’ve got to wonder if Microsoft timed the announcements to torpedo Symantec’s stock) There was nothing about an antivirus product, yet, clearly, investors are anticipating something soon.

Strip away all of the stock gyrations, and you have some business fundamentals that Symantec is trying to address. It needs to reduce its dependency on a market that is in Microsoft’s crosshairs. In a world where enterprises want to deal with a handful of strategic suppliers, it needs to broaden and deepen its portfolio of offerings. The Veritas does both of those things. It’s a market leader with superior technology and management. So, I say, soldier on, John.

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