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Six Weeks Late And $10 Short


So now you don't like Symantec?!


Dollars to doughnuts (or KKD stock - same difference) that Symantec's (SYMC) CEO John Thompson just about now is yelping like a scolded chimp (to use a Macke metaphor) over his stock price.

The point of this diatribe is to question the not-so-value adding insights printed by seemingly every sell-side shop in the business over the last 24 hours.

Let's be clear: I am aware of the dangers of sizeable acquisitions such as the Veritas (VRTS) deal, and most mergers end up not working. But if any company meets the criteria of a successful serial acquirer it is SYMC. Beginning with the $500M Delrina deal back in 1995, the $700M deal for Axent in 2000, and more recently the $370M Brightmail purchasel, SYMC has had a history of picking off good companies at reasonable prices and integrating the products very successfully. And when they screw up they do not hesitate to punt the products (see the ACT! fiasco).

Yes, the deal size is 10 times the next largest acquisition. And yes, Veritas' business is not exactly an area Symantec has been involved in before, though from "30,000 ft.", security is all about keeping bad stuff and bad people out of your storage devices - so the two concepts are hardly foreign to each other. The food chain of creating, delivering, using and storing content is becoming less well defined by the day, and security must be flexible enough to morph into every orifice of that process. That's why Juniper Networks (JNPR), for example, paid through the nose to acquire Netscreen.

But the $10 haircut SYMC has taken over the last 6 weeks appears to be plenty of a discount for these risks. Right now, SYMC is paying about $8.4b (net of VRTS' cash) for $450M of '05 earnings and something close to $500M in free cash flow. Cheap? No. Hoofy nuts? Neither. Sell-siders were going gah-gah over SYMC at 32x FY '06 EPS of $.99 (ex - VRTS), but they all hate it at 23x FY '06 EPS of $.99 including VRTS. Meanwhile, net cash in the bank post-closing will be a "noice" $3.2b, and FCF for the combined companies should be above $1 billion. I have seen worse outcomes.

And let's pick apart the primary reasons being given for not liking the deal:

1. SYMC buying VRTS must mean its core business must be slowing: Uh? You mean to tell me it started slowing because of the acquisition? Either it was fine a week before the deal, or it was not. If the former, then the core biz is probably OK a week after the deal; if the latter, then most sell-siders had it all wrong to begin with and what's the point of listening to them now.

2. Computer Associates (CA), Microsoft (MSFT), AOL (TWX), etc., are beginning to give away security software as a freebie. OK, I agree that's not good. But, again, what's that got to do with buying VRTS? If anything, the deal will give SYMC product differentiation. Plus, and you've got to make a leap of faith with me on this one, being scared that Mr. Softee will eat everyone's lunch if it only chooses to do so, is a bit too 1990's for me. If you look at the Xbox, database software, gaming and a variety of other non-Windows / Office related products, competitors have continued to do just fine against Mr. Softee, despite its monopolistic footprint.

3. Integration: yes it's a risk, but an execution risk. Analysts had love fests every time SYMC bought other companies and successful integration was a given. And I am going to speculate that in the four years that Thompson has been on the Seagate (STX) Board of Directors, he just might have gotten a pretty good idea of what buying Veritas entails. The guy has grown SYMC's sales by 150% in five years and quintupled its market cap., I'll give him the benefit of the doubt.

4. SYMC paid too much. This can be debated ad-nauseam, but I'll circle back to the point that SYMC stock price has already paid a 35% penalty for this type of not-so-foregone conclusion. Downgrading the stock at $23 seems precisely the type of reactive behavior that Toddo often speaks about, and that more often than not ends up being costly.

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Positions in SYMC, MSFT, TWX
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