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01/06/2005

Shotgun Wedding: Is Symantec Afraid of Microsoft's Baby?

The investment bankers marrying off Symantec and Veritas had better not ask Wall Street to “speak now or forever hold its peace” because they are likely to get quite an earful.  Indeed, with Symantec’s stock down almost 23% since the deal was first rumored The Street has already spoken, and from what it’s saying these two lovebirds are going to have a hard time formally exchanging vows.

Conventional wisdom holds that much of this sell-off has been driven by (mostly valid) concerns that Veritas’ relatively lower growth rates will drag down Symantec’s high flying multiple, but underneath these surface issues likely lies a more deep-seated fear that Symantec’s Cinderella story may soon be over thanks to the fact that Microsoft is finally fully pregnant with a new, security focused “baby”.  Viewed from this perspective, Symantec’s surprise merger with Veritas is a shotgun wedding that implicitly acknowledges the fact that Microsoft may shortly make the consumer and SME security software marketplaces a very bloody battlefield leaving Symantec with no choice but to “go corporate” in a hurry.

Waiting For Godot

Pundits, hedge funds, and Pollyannaish anti-trust types have long speculated that Microsoft intends to make security software one of its core business units.  At first such desires were assumed to simply be motivated by Microsoft’s insatiable appetite for growth and their Conan the Barbarian-like desire to crush their enemies, see them driven before them, and to hear the lamentations of their women.  However in the last couple years, thanks largely to Outlook and IE born viruses, Microsoft’s security software ambitions have been transformed from mere sport, into a critical business issue.  With every widely publicized e-mail virus, Microsoft’s reputation takes a heavy hit and its customers become more and more perturbed. As a result, security software has gone from a “nice to have” to a “must have” for Microsoft.

With Windows XP Service Pack 2, Microsoft took its first tentative steps in this direction, but the company realizes that the only way to fully protect its software from security threats it to deeply integrate security technology into the core of operating systems and desktop applications.  This realization set the stage for two small acquisitions by Microsoft.   The first acquisition was of a small anti-virus software maker called GeCAD in June of 2003 and the second was of a small anti-spyware company called Giant in December of 2004.

Collapse of the Confident Facade

Symantec has paid close attention to Microsoft’s moves and has gone to great pains to downplay them and insist that their anti-virus corporate accounts were not at risk even if Microsoft moved with full force into the anti-virus marketplace. Most investors have taken Symantec at its word assuming that the management team had reason to be confident and that Symantec, like Intuit, might be one of the few companies that could not only survive but thrive in the face of full fledged Microsoft assault.

Unfortunately for Symantec, actions often speak louder than words and in this vein its surprise acquisition of Veritas speaks volumes.  If Symantec was so confident that it could survive Microsoft’s antivirus onslaught, why then are they suddenly purchasing a software company growing at half their rate and operating in sectors that have little if any synergy with Symantec’s current security-focused product lines?  In fact, of all the potential companies that the street has theorized Symantec might buy (I actually had my own theory), Veritas was one of the last companies that people expected Symantec to buy.  It’s almost as if Symantec is trying to move away from its core business as far and as fast as possible.

Thus Symantec’s acquisition of Veritas is an implicit admission of two key points:  1) that Microsoft’s entry into the security software market is making that market a much less attractive incremental investment space and 2) that SYMC can’t sustain the growth rates that were, until recently, supporting its lofty PE. In this light, the 23% decline in SYMC’s stock price is not only understandable, but probably less than one might otherwise expect. If Symantec and Veritas can’t counteract these concerns and convince the Street that their merger is the result of mutual love and respect for a viable long term growth strategy, then they had better cut short their romance as shotgun weddings don’t work when the real issue is another person’s baby.

January 6, 2005 in Operations Management, Security, Stocks | Permalink

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