Updated from 1:38 p.m. ESTWithin hours of the announcement that antivirus maker Symantec ( SYMC) and software storage vendor Veritas ( VRTS) would merge, skeptical investors shaved about a billion dollars off the value of the all-stock deal. In recent trading, shares of Symantec were off $2.31, or 8.4%, to $25.07, while Veritas shed 30 cents, or just over 1%, to $27.81 a share. When the transaction was announced before the market opened Thursday morning, the deal was valued at $13.5 billion, making it the largest-ever software merger, eclipsing the hostile takeover of PeopleSoft ( PSFT) by Oracle ( ORCL) for $10.3 billion. Symantec CFO Greg Myers downplayed the selloff, pinning much of the loss in share value on arbitragers. He conceded, however, that "the buy side probably doesn't understand the rationale for the merger. As it becomes clearer, we think the market will settle down," he said during an interview. Myers chided Wall Street for its fear of "doing something different. Look around and you can see security companies out there that used to have market caps in the billions and now they are just a bag of bones." Symantec, he added, does not have that fear. With total revenue of about $5 billion, a combined Symantec and Veritas will be the world's fourth-largest software vendor, after Microsoft ( MSFT), Oracle and SAP ( SAP). Under the agreement announced by the two companies, Veritas stock will be converted into Symantec stock at a fixed exchange ratio of 1.1242 shares of Symantec common stock for each outstanding share of Veritas common stock. The deal price represents about a 9.5% premium for Veritas shareholders. The deal is expected to close in the second quarter of 2005. Symantec Chairman and CEO John Thompson will head the combined company, which still will be called Symantec; Veritas CEO Gary Bloom will become president and vice chairman. Word of the merger leaked earlier this week after about a month of talks between the companies, which are located fairly close to each other in Silicon Valley. Symantec's stock has lost about one-fourth of its value since the news spread; it had closed Monday just under $33. In essence, the companies are attempting to create a one-stop shop where businesses can buy software to store and back up their data, and protect it from hackers, viruses and other threats. "Customers are looking to reduce the complexity and cost of managing their IT infrastructure and drive efficiency with fewer suppliers," said John W. Thompson, chairman and CEO of Symantec. "The new Symantec will help customers balance the need to both secure their information and make it available, thus ensuring its integrity." Veritas CFO Ed Gillis said the merger will add to fiscal 2006 earnings. The company gave preliminary guidance for 2006, predicting revenue of $5 billion and EPS of 83 cents. Without the writedown for accounting purposes of $300 million of Veritas' deferred revenue, the combined company would earn 99 cents a share.
Unlike PeopleSoft and Oracle, the two companies have little overlap, so massive layoffs are not on the agenda. "This is not a defensive merger; our focus will not be on cost-cutting," Gillis said. But investors and some analysts seemed unsure the two businesses would work well together. In particular, there are concerns that Veritas will be a drag on Symantec's growth rate and that the difficult task of integrating two companies with a combined workforce of 13,000 will give competitors such as EMC ( EMC), which has been gaining market share from Veritas, an opening to make even more gains. "We were able to make gains vs. Veritas in the last year while we were busy integrating a major acquisition," said a spokesman for EMC. "In 2005, we will be focused on execution, but they won't have that luxury." Several investment banks quickly downgraded the stocks. "The negatives, in our view, include a dampening of Symantec's growth profile, lower model visibility, a potential signal that Symantec's core business could slow, and significant execution and integration risk," said Legg Mason analyst Todd Weller who lowered Symantec to hold from buy. Piper Jaffray analyst David Rudow downgraded Veritas, saying that at $28, shares have hit his target price and he sees little upside. However, Richard Williams of Garban International Equities sees interesting possibilities in the merger. "The key difference between this type of merger and that of 'OracleSoft' is that SYMC/VRTS creates a new industry, one that we call 'Assurance,' or securing data from all sources in a hostile business environment. We see this as an attempt to combine two synergistic businesses rather than the traditional cost-cutting merger. It will be difficult, however, and involve a time-consuming and most likely costly integration process." Williams and others maintain that the spate of mergers in the software sector is
a sign of weakness. "The merger comes in the face of a stumbling enterprise software industry, which has grown licenses by a paltry 1.27% with currency," he wrote. (None of the analysts mentioned in this story work for a company with an investment banking relationship with either Symantec or Veritas.)