Why Did Veritas Sell Out?

Gary Bloom, now vice chairman and president of Symantec and previously the CEO of Veritas Software, defended his company’s decision to be taken over by Symantec when I caught up with him the other day. But Symantec’s latest results leave some unanswered questions.

Symantec announced its intention to buy Veritas on December 16 2004, initially priced at $13.5bn. It is a deal that created the world’s fourth largest pure-play software company, but news of the deal was followed in quick succession by numerous analysts and investors questioning its logic, not least because both companies had appeared to have been doing rather well independently.

Symantec CEO John Thompson, who kept that role in the merged company, reportedly joked in June that closing the deal was, “Like a dog that’s chasing a car”, in that “Now that we’ve caught it, people ask, ‘What do you do with it?’”

Symantec’s shares were trading at around $33 before the December 16 announcement, but as criticism of the deal escalated, dropped to around $25 by early January, prompting Thompson to state: “I don’t understand the haircut we got, I just don’t.”

Speaking to me, Bloom conceded that had storage software company Veritas not been approached by Symantec, it would not itself have been on the look out for security acquisitions: “We were not looking to acquire security companies, that is true,” he said. “But that is partly because Symantec was so strong in that space, that when we looked at the security sector we saw that competing with them would have been very painful.”

“We were a successful independent company, and the big challenge was the lack of available M&A candidates,” Bloom continued. “Our acquisition of [email management and compliance vendor] KVS was a good example of what we were trying to do, but when you looked at the kind of technology purchases available to us, few had meaningful revenue streams.”

“We looked at all our strategic alternatives, including organic growth, a large acquisition of our own, or carrying on – business as usual,” said Bloom. “If we did decide to be acquired, then who were we to be aligned with? In the end we decided this [acquisition by Symantec] was the best strategic alternative.”

So why did the acquisition make sense, given that Veritas was itself not about to buy a security company? “Both companies have market leadership, storage and security are numbers one and two by spending, and there was limited product overlap,” said Bloom. “John [Thompson, CEO of Symantec] and I believe that it is better to put two leaders together than bring together two broken companies just to slash costs.”

Bloom and Thompson knew each other well, so “making contact was not difficult,” as Bloom put it. “He approached me in September last year, and we talked about the fact that the trend of consolidation had already begun, and we started talking about what would happen if we pulled the two companies together; we were both looking for new opportunities, and we asked each other what this could do for the customer – how we could win together.”

So once the deal was done, how did the companies set about integrating these two behemoths of the software space? “We both had experience of acquisitions, but not on this scale,” conceded Bloom. “So we hired in experts. We got Bain & Company for advisory services and go-to-market advice, and PricewaterhouseCoopers to do the back-end integration of supporting infrastructure and systems.”

Bloom said the integration would have been far harder were it not for the fact that both companies were running Oracle 11i for enterprise applications, though as he pointed out, “Any two ERP instances are always different.”

“We’re about one hundred days in now, and it feels like it is going very well,” Bloom continued. “PWC are winding down now, and there are only a few limited advisory services still going on. One of the things we decided was to ‘stay in our lanes’ – we didn’t want any discontinuation of the strong relationships that each company had with their customers.”

So far, however, the results of the merger have been mixed. In Symantec’s latest quarterly results published at the start of November, merger-related costs saw the company post a net loss of $251.3m, compared to $135.6m in the year-ago period.

Without those costs it would have posted a net profit of $273m. But the combined entity’s storage management revenue came to 21% of total revenue, up just 6% from last year. Thankfully Symantec’s security business helped buoy total revenue to $1.05bn for the quarter versus $618.3m a year ago. Still, revenue came in below Wall Street targets of $1.35bn, which helped send shares in the company down 9.6% in after-hours trading on the day of the results announcement.

One thing is certain: it will take more than evangelizing from Veritas’ Bloom to convince the Street that this deal made sense – all eyes are on Symantec’s future earnings and sales growth for real evidence that this deal has been a success. If the history of technology M&A’s is anything to go by, that is no easy challenge.

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