Symantec Struggles to Find Its Way

It wobbles as executives leave and acquisitions are questioned.
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SAN FRANCISCO -- Once the golden child of the IT security industry,

Symantec

(SYMC) - Get Report

can't seem to get it right.

Last week, the Cupertino, Calif.-based company announced the departure of two senior executives and said it is going to lay off a little less than 3% of its current workforce to control costs. This is on top of the 5% cut in personnel earlier this year to save $200 million.

Meanwhile, Symantec continues to acquire companies, including a recent $350 million deal for Vontu, a data-leak prevention company that led some analysts to complain that it may have overpaid -- and revived oft-repeated criticism of the company's acquisition strategy.

Symantec's stock has taken a beating: It closed up 17 cents, or 1%, to $17.46 on Thursday, edging close to its 52-week low of $16.20. Meanwhile, rival

McAfee

(MFE)

closed down 92 cents, or 2.4%, to $36.19, just off its 52-week high of $37.06.

Some industry observers say that unless Symantech can reinvent and position itself as a clear leader in terms of technology and market share, the IT security giant is likely to find itself in a highly competitive market, with little to differentiate its software from other security products.

"Symantec once used to be the big name for their space," says Roger Nusbaum, chief investment officer at YourSourceFinancial, a small independent investment advisor.

"But the security space has evolved, become more commoditized and there is less and less differentiation, stickiness and loyalty, which hurts Symantec's ability to grow." Nusbaum, a contributor to TheStreet.com, does not own shares of Symantec.

It won't be long before investor patience with Symantec and CEO John Thompson wears thin -- especially after the $10.25 billion deal for Veritas in 2006, which soured many investors on the stock, says Peter Hofstra, vice president & portfolio manager at AIC Investment Services. Symantec is one of the top 10 holdings in AIC's Diversified Science & Technology Fund.

"John's probably got two to three quarters before the pressure starts mounting," says Hofstra.

Symantec was a consumer favorite for its Norton line of anti-virus and Internet security products. But in the last three years it has faced increased competition with companies like McAfee,

Trend Micro

and

Microsoft

(MSFT) - Get Report

.

"The key security technologies -- anti-virus, firewall and anti-spam -- are now available everywhere," says Hofstra. "Any ISP today offers these solutions. Microsoft even has its own firewall built as part of its operating system products."

The result? Consumers are increasingly indifferent to the various brands of anti-virus software.

Symantec's corporate products also face a slowdown because niche start-ups are providing more innovative solutions while Symantec tries to sort out problems with its sales force.

The latest round of executive departures is only likely to deepen investor concerns as key managers leave the company. Over the last two years, Symantec has seen the

departures of the group president of its security and data management group, chief technology officer, and chief financial officer along with a few other executives

And last week Symantec announced the departure of Kris Hagerman, president of the data center management group, and James Socas, senior vice-president of corporate development. In the second quarter, the data center management group, which accounts for 28% of the company's revenue, posted 7% growth in revenue year-over-year but declined 1% from the previous quarter.

Symantec's troubles started with the acquisition of storage company

Veritas

. Integration issues around Veritas have caused Symantec to miss analysts' estimates. While Symantec recently said that it has finally blended the two companies, investors aren't yet convinced.

"Before Veritas, Symantec executed everything it touched beautifully and after Veritas somehow everything was different," says Nusbaum.

Since the Veritas purchase, investors have had a hard time believing that Symantec can deliver consistent growth, says Hofstra. "They are not in any headline areas right now like virtualization or Internet advertising so it's all about fundamentals and quarterly calls."

And on that point, Symantec has posted disappointing results. Last month, the company reported

higher-than-expected second-quarter results but issued a conservative outlook that weighed down the shares. Although first-quarter results blew past estimates, it came on the heels of mixed guidance for the year.

Reaccelerating growth across its business may not be easy. Competition for consumer dollars is only likely to get more intense with little differentiation among the various anti-virus products on retail shelves.

Finding a fast-growing business security segment will also be tough. Consider the data-leak prevention market. Two years ago, it was still an emerging market that was hailed as one of the industry's hottest new segments.

Now data leak prevention is already approaching

commoditization, with the market flooded with a number of products, says Nick Selby, an analyst with independent research firm, The 451 Group.

"I know of at least 10 acquirers who are still looking to purchase data-leak prevention products," he says. In the last two years nearly $1.3 billion have been spent by security companies to acquire data-leak prevention products, estimates Selby.

For Symantec that may be bad news, especially if its costly purchase

purchase of Vontu yields minimal returns.

Symantec's fall from grace stands in contrast to rival McAfee's rise. Despite battling charges of accounting fraud by the Securities & Exchange Commission, the resignation of long-time CEO George Samenuk in October 2006, an interim CEO till April, McAfee has bounced back.

The company's centralized management console, which has been

a hit with customers, and its network security sales helped push

third-quarter revenue past analysts' expectations. McAfee's strong relationships with ISPs also helped consumer division revenue grow 14% during the quarter; Symantec's consumer division grew 10% last quarter.

McAfee's stock has soared nearly 25% since the beginning of the year.

"McAfee is a simpler story with fewer moving parts," says Nusbaum. "I doubt their software is any better than Symantec but it is an easier story for the for investment community to understand."

For Symantec, there may be a lesson there.