Symantec Breakup Is Best Hope to Boost Stock: Real M&A


Laura Lorenzetti and Tara Lachapelle

Mar 30, 2014

For Symantec Corp. (SYMC), the first step to turning around one of the worst-performing stocks in the Standard & Poor’s 500 Index may be to break it up.
Shares of Symantec have been slipping for the past eight months as the $14 billion maker of security software and computer-storage systems grapples with declining sales. This month, the company fired its second chief executive officer in two years, delivering another blow that left it with the industry’s lowest valuation, according to data compiled by Bloomberg. Analysts have an idea for the next CEO: Figure out what the most promising pieces are and shed the rest.
“They need to get smaller before they get bigger,” Matthew Hedberg, a Minneapolis-based analyst at Royal Bank of Canada, said in a phone interview. “Keeping Symantec as we know it today just doesn’t work.”
Symantec should narrow its focus by selling the storage unit and spinning off its Norton antivirus products, which have growth opportunities because of the need to protect personal information on mobile devices, said Topeka Capital Markets Inc. RBC suggests honing in on security for business customers and making acquisitions to bolster those offerings. Former CEO Steve Bennett already began splitting apart the teams that sell the security and storage products before his ouster, making a breakup easier, according to Sterne Agee & Leach Inc.
A representative for Symantec said the Mountain View, California-based company doesn’t comment on speculation.
Revenue Drop
Bennett has blamed Symantec’s lower revenue in recent quarters on the sales-force restructuring, which was meant to help restart growth and instead disrupted customer relationships. A slumping PC market and the emergence of advanced hacking threats also has crimped demand for traditional antivirus software like Symantec’s.
The data-storage business -- which Symantec entered in 2005 with its purchase of Veritas Software Corp. -- is declining as well.
Bennett said in January that he was still aiming to increase revenue at a compounded annual rate of 5 percent. Analysts, though, see sales falling this year and next, according to estimates compiled by Bloomberg.
Symantec shares have dropped 20 percent in the past 12 months, lagging all but 10 of the 500 stocks in the S&P benchmark equity index. The company’s enterprise value last week was equal to 6.1 times its trailing 12-month earnings before interest, taxes, depreciation and amortization, a lower multiple than any other U.S. software maker valued at more than $5 billion, data compiled by Bloomberg show.
The stock rose 0.9 percent to $19.97 today.
Breakup Option
Symantec’s “options now are pretty much pointing towards breaking it up,” Robert Breza, a Bloomington, Minnesota-based analyst at Sterne Agee, said in a phone interview. “Once you split the company, you’re going to reduce administrative costs, R&D costs, selling and marketing costs. It will allow them to hone their focus, and then it will actually create more shareholder value.”
The company could spin off its consumer unit as a separate publicly traded company, said Frederick Ziegel, an analyst with New York-based Topeka Capital. That business generates about a third of Symantec’s $7 billion of annual revenue. While consumer demand is slowing for its legacy antivirus software, growth could come from developing new products for mobile security, he said.
“It would look a lot like a Microsoft or an Oracle,” Ziegel said, referring to Microsoft Corp. (MSFT) and Oracle Corp. (ORCL), the world’s two biggest software companies. “You can run it for cash flow -- they have a lot of that. And maybe over time they diversify.”
‘Real Value’
Because of the steady revenue and cash flow that the consumer-targeted software generates, that business may even attract a private-equity buyer, said RBC’s Hedberg. Shedding that and the storage business would allow Symantec to shore up its higher-growth corporate unit and possibly build onto it with acquisitions, he said.
The enterprise piece “is the real value of the company,” Hedberg said. “I would love to see them focus on that business, focus on what they’re good at.”
Based on the sum of its parts, Symantec should be valued at as much as $27 a share, 36 percent more than the stock’s closing level last week, according to Dan Ives, a New York-based analyst at FBR & Co. Even so, splitting up may be unlikely at this point after Bennett’s departure.
What Next
“There’s always been speculation of a breakup, but if that was going to happen, it was going to happen under Bennett,” Ives said in a phone interview. “A lot of investors are at a loss for words in terms of what the next steps are.”
Symantec could attract an activist investor, according to Don Bilson and Eric Wiley, event-driven analysts at Gordon Haskett & Co. in New York. While others say that’s unlikely unless the stock price comes down more, they see it as a possibility because not many traders are wagering on further declines.
Only 0.3 percent of Symantec’s shares outstanding are currently sold short, compared with the S&P 500’s average of 2.3 percent, according to data compiled by Markit and Bloomberg. In a short sale, traders sell borrowed stock in a bet the price will fall, allowing them to buy back the shares more cheaply and pocket the difference.
“Hedge funds may not own Symantec yet, but they aren’t short it either. We think that is notable,” the Gordon Haskett analysts wrote in a March 24 note to clients. “At this point, some shareholders might be looking for Plan B,” such as a sale or breakup.
Any bids for Symantec or its units may fall short of the price management and the board are looking for -- but that shouldn’t stop them, Hedberg of RBC said.
“I think there’s been a reluctancy to accept less than what they think is fair value,” he said. “The market is telling them that what their assumptions are for fair value right now is a bit off.”