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H-P Rumor Heats Symantec

Priya Ganapati

Market chatter about a possible buyout of IT security giant Symantec(SYMC Quote), and an analyst report suggesting that the company may be undervalued, drove Symantec shares up nearly 4%.

With large IT players seeking to round off their portfolios by adding a strong line of security products, market buzz that Hewlett-Packard(HPQ Quote) could be eyeing Symantec drove up investor interest in the stock Monday.

Symantec is also trading at a significant discount to its peers, wrote analysts Brian Freed and Paul Gillespie in a Morgan Keegan research report. Morgan Keegan makes a market in Symantec shares.

Shares of Symantec were up 66 cents to $20.59. The company is slightly below its 52-week high of $22.19.

It's not the first time that talk about a possible buyout of Symantec has come up. Through the last six months, the IT security industry has been going through a consolidation phase. In June, storage specialist EMC(EMC Quote) bought authentication security-software company RSA for $2.1 billion.

Two months later, IBM(IBM Quote) bought security company Internet Security Systems for $1.3 billion.

As technology customers seek greater security for their products, technology players such as H-P, Microsoft(MSFT Quote), Oracle(ORCL Quote) and SAP(SAP Quote) are looking to buy security companies to round out their products.

Meanwhile, talks of a possible H-P-Symantec deal has gained ground.

At this point, it looks like a long shot, says Richard Williams, senior software analyst with ICAP, which does not own shares or have a banking relationship with Symantec.

"When we first heard about this, we did research that showed it wasn't very likely," says Williams. "That said, you never know what is possible within corporate minds since strategies change all the time. But we found that it didn't make as much sense for such a deal."

Symantec declined to comment on what it said is "rumor or speculation."

The company faces significant pressure from Microsoft, which recently entered the consumer security business. Microsoft's consumer antivirus and backup product, Windows OneCare, released in May has about 1.5% of the retail channel market share, according to researcher NPD group.

"Our take is that Symantec over time is vulnerable to competition from Microsoft that will erode its antivirus business, which has been the driving force making the stock a winner in last five years," says Williams.

Still, some analysts such as Morgan Keegan's Brian Freed believe that the company is undervalued. "Our relative valuation analysis implies a fair value of $22.35 per share, net of cash," he wrote.

Freed compared Symantec with rivals McAfee(MFE Quote), Check Point Software(CHKP Quote), Citrix(CTXS Quote) and CA(CA Quote). Based on the discounted cash flow analysis, he suggested a fair value of $24.64 to $26.25 a share.

"Taking an average of the two valuations, we come up with a fair price of approximately $23.93, which is roughly a 20% premium to current levels," the report said.

Symantec stock has been up 7.8% in the three months since Sept. 11, and up nearly 18% in a year.

That may not amount to much if you look at the performance of Symantec and its peers, such as Check Point, over a two-year period, says Robert Lawton, portfolio manager with the Catoosa Fund, which does not own shares of Symantec.

"Regardless of how these companies try to repackage what is essentially their competing, one-product commodities in an arguably mature, slow-growth market, the bottom line is that these nondividend-paying stocks haven't budged much," he says.