Mergers & Acquisitions on Ulitzer

• Breaking News: Symantec To Buy Veritas

Symantec, the consumer anti-virus house, is buying Veritas, the enterprise storage and backup manager, for $13.5 billion in stock. The price works out to roughly $30.75 a share, better than a $5 premium over Veritas' closing price on Friday before trades shot up on rumors Monday and the story leaked to the New York Times on Tuesday (please see photo below).

Actually Veritas has spent much of the past year way below 25 bucks having yielded both its reputation as a premier growth stock and its 52-week high of $40.68. Symantec's stock, on the other hand, is currently a hot commodity, up 100% in the last year on the back on security concerns.

At least it was until news of the impending deal broke. In the last few days Symantec has lost more than $7.75 a share, almost 25% of its value, a factor that reportedly complicated final negotiations and apparently upped the price.

The transaction is supposed to be the largest software acquisition ever. By way of comparison Oracle, in that other blood sacrifice to the reigning consolidation gods, is paying $10.3 billion in cash for PeopleSoft.

Sources claim that the Symantec-Veritas deal, which oddly mixes enterprise with desktop DNA, is only a first step for Symantec and that the ex-IBMer who runs the place wants to build the next great software company, a giant that would compete with IBM and Microsoft for dominance of the distributed, on-demand, web infrastructure.

To do so they say Symantec CEO John W. Thompson plans to acquire other companies beyond Symantec. Sources name Mercury Interactive, Compuware and Novell in that order.

Mercury would give Symantec the where withal to test and monitor corporate Internet applications and improve the performance, availability, reliability and scalability of web sites. Compuware, reportedly on the block for maybe $2.3 billion-$2.4 billion, would give it the mainframe software to bury Computer Associates and Novell has identity management and Linux.

Mercury's market cap is currently $3.8 billion and Novell's is $2.65 billion. Sources expect Symantec to make its next move in a year, which jibes with suggestions John W. made during the conference call announcing the merger Thursday morning. He said Symantec would look around once it could raise its head from the Veritas acquisition, which is supposed to close in Q2. The combined company would have $5 billion in cash to do deals, $2.8 billion contributed by Veritas.

Even without the others, the Symantec-Veritas combine already noses out rival CA as the fourth-largest software company in the world behind Microsoft, Oracle and SAP. Both Veritas and Symantec do about $2 billion a year and together are promising to produce 18% growth and $5 billion in revenues, 75% from the enterprise side and 25% from the consumer side. CA does about $3.4 billion. CA, which is losing share in all its markets, is thought to be a poor takeover target despite the consolidation craze because of the novel deferred prosecution deal it cut with the government to stay out of jail.

Because it was caught finagling revenue recognition to the tune of billions of dollars, CA is looking at 18 months of strict oversight to ensure it keeps to the straight and narrow. That 18-month clock won't start until a court-approved monitor is named and that hasn't happened yet.

Among other things, the combined channel strength of Symantec and Veritas is going to be a problem for CA, which is now trying to move into the channel in an effort to prop up its flagging sales. Symantec's immediate problem is to sidestep Microsoft's anticipated move into anti-virus software, an event expected to hurt Symantec's flagship Norton anti-virus interests as well as its competitors McAfee and Trend Micro.

John W. claimed the Veritas acquisition was an offensive move, not a defensive one. He called it a "powerful, powerful combination with enormous synergies and leverage," touting it as making Symantec the "fastest-growing company above $3 billion."

However, the marriage of the de facto security leader and the de facto storage leader appears at first glance to be a mismatch and raises doubts about how an enterprise company is going to be integrated into a consumer company.

One is basically a Unix company. The other is a Windows company and the people they sell to are different, even if it's in the same company.

John W. brushed aside questions of culture clash and claimed that the fact that both companies were software companies gave them essentially the same culture. He did however admit that there was no overlap in products, strategy or R&D. He's counting on the perception that people want to deal with fewer vendors.

It is generally agreed that, based on its current strategy, Veritas has limited upside so getting bought is probably its best exit strategy at this point even though it is second only to EMC in storage software and actually ahead of both EMC and CA in data backup and archiving software as well as file systems. (Actually the numbers suggest Veritas has been ceding share to EMC in storage management software this year.) It has also moved into systems management and grids.

Along the way Veritas has had to restate its 2001, 2002 results as a result of accounting irregularities and in Q2 its revenues fell, feeding speculation that it had become takeover fodder.

Symantec under John W. has been no stranger to M&A. The company has spent hundreds of millions buying such items as Brightmail, At Stake, TurnTide and PowerQuest and it has been growing at upwards of 30% a year. The acquisition results have been mixed, however. Symantec probably can't maintain that growth rate organically and it's more than likely it's run out of significant acquisition targets in security so where can it go to get the next level and turn its $2 billion in revenues into $5 billion-$10 billion in revenues while fending off Microsoft?

Veritas' founder and former CEO Mark Leslie, who left the Veritas board earlier this year and is now teaching at Stanford, thinks that by acquiring Veritas Symantec transforms itself into "THE infrastructure company, which opens a much larger market. Given the size of Veritas they do so in a most convincing way, and become the undisputed leader in that market. There should be lots of synergy. By combining their product offering they can engage in 'matrix' selling - combining products into suites, much like Microsoft did with Office in the early years. This makes things difficult for competitors as most customers will opt for a set of products that work well together over a bunch of 'best of breed' from smaller companies that they have to integrate by themselves. There is probably lots of financial synergy rationalizing all of the administrative functions. And by combining the sales forces they should get greater coverage and more efficiency, which will yield much higher productivity - however it will be a blood bath, and this is one of the greatest risks of this merger."

Veritas has about 6,500 people and Symantec has 5,300 though John W. used a combined number of 13,000, 6,000 in sales, 3,500 in R&D. John W. repeatedly said that the primary motive for the merger with Veritas was not cost savings and tried to make it sound as though there would be little job loss.

Veritas CFO Ed Gilles has been put in charge of the integration and the companies will be bringing in an unnamed consulting firm to help. They have to work out a new organization, roadmaps and product schedules. Otherwise plans are pretty vague.

John W. suggested that bringing the two sales forces together was "not rocket science" and that the guys who run sales for both companies were ex-IBMers who had "done it before." Both companies have been growing their sale forces 15%-20% a year. Symantec has 1,600 people in direct sales and Veritas has 2,000.

Merrill Lynch remarked that "Software mergers are inherently risky and we see little in the deal that would have us think otherwise." The way the deal is structured Veritas shareholders will get 40% of the combined company. John W. will be chairman and CEO. Veritas CEO Gary Bloom, the ex-Oracle guy, is supposed to be vice-chairman and president responsible for sales, service and support, though folks wonder whether he'll stick around. He's reportedly been pretty detached at Veritas. Symantec president John Schwarz will be responsible for development and engineering across the combined product group.

The new board will include six members of Symantec's current board and four from Veritas' current board.

Symantec said it expects "non-Gaap earnings per share will be accretive in the first combined year of operations as compared to the Thomson Financial First Call mean estimate of 98 cents for Symantec in fiscal year 2006." Its projection does not take into consideration the loss of some $300 million in Veritas deferred revenue.

Based on IDC data, the total market opportunity for the combined company today is supposedly about $35 billion and is expected to grow to $56 billion by 2007.

The Times, which broke the story, said negotiations between Symantec and Veritas had been going on for the last month. Their boards signed off on the deal late Wednesday.

Meanwhile, CIBC says Symantec participated in $12 million C round going into Mazu Networks, a start-up that protects networks from worms and denial-of-service attacks.

• Breaking News: Symantec To Buy Veritas