McAfee.com 'Coming Home' to Target Consumer, Small Business

Network Associates says it will buy back the rest of its dot-com software spinoff.
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Shares of

McAfee.com

(MCAF)

soared Monday after its majority owner,

Network Associates

(NET) - Get Report

, announced it plans to buy back its dot-com spinoff for about $245 million in stock.

Although rumors of Network Associates bringing back McAfee into its fold were dismissed by Wall Street as recently as a month ago, investors have welcomed the move as a way of strengthening Network Associates' position in the consumer market, particularly against security rival

Symantec

(SYMC) - Get Report

.

Shares of McAfee rose $3.91, or 25.16%, to close at $19.45 Monday. Network Associates shares fell 26 cents, or 0.94%, to $27.35.

Network Associates, which already owns 75% of McAfee, offered 0.675 shares of its common stock for each outstanding share of McAfee.com. That represents a 20% premium over Friday's closing prices. Network Associates said it will formally commence its offer March 25 and hopes to complete the deal April 19. The company expects to issue about 9 million shares of stock to complete the deal.

In a conference call Monday morning, Network Associates stressed that the acquisition would end customer confusion about its relationship with McAfee, which went public in 1999 to sell antivirus software online to consumers and to small- and medium-sized businesses. Network Associates CEO George Samenuk also stressed the consolidation will better prepare Network Associates to expand its international business, which he has said he wants to increase to more than 50% of sales from the current 35%.

Gene Munster, an analyst with U.S. Bancorp Piper Jaffray, said the timing was right given McAfee's stock price. McAfee closed at $15.54 Friday, down more than 50% since the beginning of the year. "It's kind of the coming home story," said Munster, who has a strong buy rating on Network Associates and no rating on McAfee. "There's no real reason why McAfee.com should have been outside Network Associates in the first place."

Still, Munster said he was surprised by the announcement. He believes the acquisition will ultimately lead to some cost cuts and that Network Associates' retail distribution will strengthen the online brand McAfee.com. Bringing the online arm back under Network Associates' wing also should strengthen its reach to consumers and small- and medium-sized businesses.

Network Associates CFO Stephen Richards noted that the split has confused customers, who may have bought a Network Associates product off the shelf and then mistakenly looked for answers to questions at McAfee.com, a separate company. After the McAfee.com acquisition, retail sales will account for 10% to 11% of the combined companies' business.

'All-Out Attack'

With the rash of viruses last year heightening security awareness among consumers, Samenuk said the company is ready to raise that number. "We're going to go at an all-out attack at the consumer and small- and medium-business space," he said. "We believe it's an area that's certainly underpenetrated on a worldwide basis, and that gives us opportunities."

So far, the consumer market is where rival Symantec has made the bulk of its money. Symantec is now pushing to provide security products to enterprise businesses, where Network Associates has dominated. "They are on a collision course here," Munster said of the two security firms. Munster does not have a rating on Symantec.

Banc of America Securities analyst Kevin Trosian agreed the two are increasingly going head-to-head, but he believes there's room for two players. "There is room for the next few years for them to continue to take share from some of the other players," he said.

Trosian has a buy rating on both Network Associates and Symantec, and his firm hasn't done any business with either company. He doesn't cover McAfee.

Ultimately, Trosian took the acquisition as a sign of Network Associates' strength. "We think the estimates for the company are likely to go up throughout the rest of the year," Trosian said. "We think this is an indication of the positive strength of their business."

Network Associates has forecast it would earn 42 cents to 47 cents a share in pro forma profit on revenue of $860 million to $890 million in fiscal 2002, excluding McAfee. That's compared with earnings of 15 cents a share on $772 million in revenue in 2001. The consensus estimate on Wall Street is for Network Associates to earn 51 cents a share on $882 million in revenue in 2002.

Network Associates said the acquisition will reduce 2002 pro forma earnings by 1 cent.

McAfee, meanwhile, has suffered since the company said on Jan. 17 that it collected only 125,000 subscribers in the fourth quarter, down from 200,000 in the third quarter. But the company forecast pro forma earnings in 2002 would as much as double from 2001 -- to 25 cents to 28 cents a share -- on revenue expected to increase as much as 45% -- to between $80 million and $90 million.

The only disadvantage Trosian sees to the acquisition is that McAfee.com would have a lower operating margin in the longer term than the typical software model. However, the revenue is more predictable because it's subscription-based.

Munster, meanwhile, noted that after the acquisition, Network Associates would be hurt if business declines at McAfee, as it did in the fourth quarter when the number of new subscribers decreased. "If McAfee.com business declined, it's nice to have it off your income statement from Network Associates' perspective," he said. "There's a PR insurance policy that's been eliminated."