Mixed Verdict on Network Associates Moves

The shares recover but close down after the company says it will sell its network-management unit.
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Security software vendor

Network Associates

(NET) - Get Report

got rough treatment on Wall Street Friday after saying it will sell its network management business.

The morning after the sale of the Sniffer business and a reorganization were announced, shares of the company were off nearly 6%. Later in the session, the stock recovered a bit and closed down 71 cents, or 3.6%, to $19.04.

Although the sale has been expected for some time and is generally seen as a positive, it will hurt financial results in the near term.

The company also said that it expects pro forma earnings of 10 cents a share in the just-completed first quarter on sales of $217 million. That's actually $5 million more in revenue than the company (or analysts) had projected earlier in the year and also equals EPS guidance. But analysts polled by Thomson First Call were expecting an 11-cent profit in the March quarter.

Sniffer will become a standalone company called Network General. When the $275 million cash sale to private equity companies Silver Lake Partners and Texas Pacific Group closes later in the year, Network Associates will change its name to McAfee, after its well-known line of anti-virus software.

Explaining the market's reaction to the sale, analyst Alan Weinfeld of Fulcrum Global Partners said that because the company will continue to support Sniffer customers who are also McAffee customers during a transition period, "Network Associates will lose Sniffer sales from its revenue line faster than it will be able to take out Sniffer's expenses and other infrastructure costs." (Fulcrum does not have an investment banking business.)

Goldman Sachs analyst Sarah Friar said in a note to clients that "the price paid seems reasonable given the ongoing drag that Sniffer caused on growth rates and margins." Speaking of the core security business, Friar said she expects it grow by about 15%, "in today's security-conscious environment." (Goldman has a banking relationship with Network Associates.)