Will Symantec Benefit from Intel Buying McAfee? (SYMC)

Symantec (SYMC)

Last week, the biggest tech story was that Intel (INTC: Charts, News, Offers) had bought out antivirus company McAfee (MFE: Charts, News, Offers) in a puzzling $7.68 billion all cash deal by paying a 60% premium. What does this deal mean for the remaining players in field, most notably the largest security and antivirus software maker in the world, Symantec, whose flagship Norton Antivirus software has dominated the market at 64% for the better part of the last two decades? Symantec’s Norton Security products comprise of a third of the company’s revenue, but it is facing a different battlefield moving into the second decade of the 21st century. Freeware, OS bundled, cloud-based and now processor-based antivirus programs have led many to believe that Symantec’s margins will inevitably shrink as competition intensifies. Others, however, believe that Intel absorbing McAfee will be a diversion that will ultimately benefit Symantec by casting doubt upon McAfee’s value to enterprise customers.

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Stock Analysis

Symantec is the largest provider of security software for enterprise and home users. It’s best known for its flagship product, Norton Antivirus, and is widely spread throughout the Americas (earning 54% of total revenue), Asia Pacific (15%) and Europe/Middle East/Central Asia (31%). It has a large partner base of 40,000 companies worldwide, including OEMs, ISPs and retail/online stores. Besides its antivirus software line, which brings in a third of its revenue, Symantec also focuses on enterprise firewall security, mass storage and backup software – a well-rounded security portfolio which brings in the remaining 2/3 of its yearly revenue. It has consistently high margins of 12% as opposed to McAfee’s 8%. Its primary rivals include McAfee, Trend Micro (TMICY: Charts, News, Offers) and Juniper Networks (JNPR: Charts, News, Offers) who all offer similar suites for computer and network protection. At the end of July, Symantec announced better than expected net earnings of $114 million up from $91 million the year before. Its total revenue also increased to $1.31 billion, up from $1.15 billion. However, guidance was lowered by 4-6 cents per share, and a decrease in revenue to $1.24-$1.27 billion, due to conservative estimates regarding lowered or stagnant PC demand and instability in the global macro environment. To offset the negative outlook, Symantec announced a $1 billion share repurchase plan effective immediately and plans to cut $200 million in costs, although the affected departments have yet to be specified by CEO John Thompson.

Intel’s purchase of McAfee, which is a distant second in the antivirus market at 21%, for such a high premium, has been widely criticized as a foolish attempt to expand outside its core business. Intel has claimed that by buying McAfee, it is preparing for a cloud-based revolution, in which not only computers but ATMs, credit card processors, home appliances and a myriad of other devices will be permanently connected to the Internet via computer-like interfaces and will eventually be powered by its CPUs. It is the same “smart machine” vision that Google (GOOG: Charts, News, Offers) has planned for Android. Intel’s rationale is an extremely speculative supposition, as it is planning for a role in technologies which have not yet been fully developed yet. In addition, the anti-virus side of things has traditionally been handled within the operating system, not in the hardware.

For now, Symantec stands to gain from Intel’s buyout because the merger generates so much uncertainty regarding McAfee’s future. Does Intel plan to keep McAfee as a separate subsidiary to generate profit, or does Intel have some larger scale hardware-software integration solution down the line that may disrupt McAfee’s current line of products and its workforce? Enterprise consumers to whom stable, dependable network-wide security is paramount in importance will not take kindly to Intel-McAfee’s uncertain future, and will likely shift to its rivals, the largest of which is Symantec’s Norton Products. In addition, Intel-McAfee would be less likely to respond to Symantec’s pricing cuts and could actually have to raise prices due to the costs of the merger. Lastly, Symantec’s stock is trading at a discount now, with a forward P/E of 9.08, a PEG ratio of 1.08 and still 28% below its 52-week high of 19.16, which makes it a prime candidate for a takeover.

Its 10.89 billion market capitalization makes it a likely target for Silicon Valley giants Microsoft (MSFT: Charts, News, Offers), Cisco (CSCO: Charts, News, Offers), Oracle (ORCL: Charts, News, Offers), IBM (IBM: Charts, News, Offers) or HP (HPQ: Charts, News, Offers). Each of these would benefit greatly by acquiring a full-fledged antivirus division at a discount, and any of these suitors would merge far more smoothly with Symantec than McAfee will with Intel. Microsoft could easily integrate Symantec’s technology into the Windows OS to complete their OneCare cloud-based antivirus/anti-spyware suite, Cisco could integrate the technology into their own networking hardware, and Oracle could go full circle with its enterprise lineup – with its own native software, hardware recently acquired from Sun and finally a full-fledged antivirus company. IBM and HP could use Symantec’s technology to strengthen its already large enterprise IT software base. Would any of these potential buyers, though, pay an Intel-sized premium for Symantec? Although a buyout on the horizon is possible, investors should not wager on such a huge move to counter Intel’s in the near term. However, Symantec is still technically undervalued and it may be a good time to start building a position in the company, regardless of whether or not a buyout occurs.

Other News About SYMC
Teach cybercrime at GCSE, says Symantec – Symantec seeks to increase cybercrime education
Could McAfee deal trigger a Symantec bid? – Speculation continues about suitors for McAfee

Other Stocks in the News
ServerPronto Applauds Intel’s McAfee Acquisition – At least one company is happy about the spree of mergers
Why Is Oracle Really Suing Google? Enterprise Java? – A second opinion to Oracle’s (ORCL: Charts, News, Offers

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