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Symantec, Veritas Growth Story Doubted

Symantec's 26% slide after its merger rumors bears little resemblance to Oracle's lift when it got the green light.




Veritas Software


, troubled by the hit to Symantec shares that has greeted their merger, are taking a message of reassurance on the road.

Is anyone listening?

At an investor briefing Wednesday, Symantec CEO John Thompson and Veritas CEO Gary Bloom repeatedly highlighted the growth potential of their combined companies. But shares of Symantec shed as much as 3.9% on Wednesday before rebounding slightly to close down 37 cents, or 1.5%, at $25.04. (Symantec will hold and Webcast a second investor meeting on the deal Friday at 7:30 a.m. EST.)

Since rumors of the all-stock deal first began circulating in December, shares of Cupertino, Calif.-based Symantec have plummeted a whopping $9, or 26%, from their 52-week high of $34.05, reached earlier in the month.

That selloff came in stark contrast to the 10% lift



enjoyed when it announced a day before the

Symantec-Veritas deal became public that it had finally succeeded in its 18-month quest for rival




The two mega-software deals are admittedly very different, but those differences also can help explain the widely divergent market reaction to each one.

For one, Oracle and PeopleSoft both operate in the slower-growth, maturing enterprise software market. Investors had plenty of time to ponder the integration possibilities and seemed to breathe a collective sigh of relief when the hostile takeover -- and resulting uncertainty -- finally came to a close, noted Steve Cohen, chief investment officer of Kellner DiLeo Cohen & Co., which manages an M&A arbitrage fund.

By contrast, rumors of the Symantec-Veritas deal took some corners of Wall Street by surprise. Symantec has been on a multiyear tear in the fast-growing, consumer antivirus-security space, while Veritas has recently suffered slower growth in the enterprise storage arena.

Analysts and investors say that the integration risk alone justifies Symantec trading at a lower multiple than it had, and that the possibility of Veritas dragging down Symantec growth is another reason for the price pressure -- an argument that apparently miffed Thompson. He noted that Symantec combined with Veritas should see an 18% increase in revenue in fiscal year 2006 -- the same growth estimate from analysts gathered by Thomson First Call for Symantec as a stand-alone company.

Investors "completely discounted the growth rates of the new company," Thomspon said Wednesday. "I just don't understand the haircut we got. I just don't understand it."

But Legg Mason analyst Todd Weller said there's a difference between consensus estimates and what investors actually expect -- especially for a company such as Symantec.

"The stock has been a monster performer because revenue, earnings and cash flow have been a lot higher than anyone ever expected, and the market expected those trends to continue," said Weller, who downgraded Symantec to hold from buy last month. (His firm hasn't done any banking with Symantec.)

The acquisition of Mountain View, Calif.-based Veritas and its 10% growth profile makes decelerating growth a reality, Weller further explained in a note Wednesday. On paper, the combined company looks like it will grow 13% to 15%, he said.

The other overhang on Symantec's growth continues to be the looming

threat of Microsoft entering the antivirus market. Some analysts viewed the Veritas merger as a defensive move by Symantec in response to the Microsoft threat.

Thompson said Wednesday that he doesn't expect Microsoft to have any effect on the combined company in fiscal 2006, which begins in April 2005 and ends in March 2006.

However, some analysts believe Microsoft, which announced its own

security acquisition the same day Symantec and Veritas made their news official, will become a competitive threat to Symantec in 2005.

Symantec said it expects Veritas to be accretive to fiscal 2006 earnings. The company projects it will earn 83 cents a share including a writedown of Veritas' deferred revenue, or 99 cents a share excluding the writedown, on $5 billion in revenue in fiscal 2006,

But the bottom line of the combined company is another investor concern, said Piper Jaffray analyst Gene Munster. The earnings estimate for the combined company -- including the deferred revenue write-off -- falls short of the consensus estimate of 99 cents a share for fiscal 2006, he noted. (Munster lowered his rating to market perform from outperform Dec. 16; his firm hasn't done investment banking with Symantec.)

By contrast, some investors were surprised by the magnitude of the 8-cents-a-share earnings accretion Oracle forecast for fiscal 2006 as a result of its PeopleSoft purchase. Oracle execs have said they would lay off thousands of employees to save as much as $1 billion.

On the other hand, Symantec and Veritas, with little product overlap, have no plans for major layoffs and say that the combined company's staff will reach 13,000 when it opens for business. Together, the companies expect to shave only $100 million in annual expenses.

"Our rating is based on our belief that the merger is a revenue synergy story rather than a cost synergy story, and we encourage investors to wait on the sidelines until the combined entity has had at least two quarters to demonstrate sales execution," JMP Securities Amy Feng wrote when she downgraded Symantec to market perform from market outperform on Dec. 17. (Her firm hasn't done banking with Symantec.)

Feng also echoed another concern of investors -- that the buyers of security and storage software are not the same employees within a company.

But Bloom told investors on Wednesday that Veritas has been making more sales calls on customers' security software groups.

While investors have had more than a year to think about how Oracle would integrate with PeopleSoft, Symantec has been short on such details about Veritas. Thompson said that this week is the first time senior management from each company has gotten together. "So give us some time and we'll get back to you," he told investors.

Bloom, however, did offer at least one possibility for product synergies: Consider how Symantec could take advantage of the several days' notice it has about an upcoming virus outbreak for a Veritas product that can then perform incremental backups more frequently.

Indeed, Symantec's defenders say they believe that the market may be missing the upcoming

convergence of storage and security into a broader infrastructure field.

"We believe the infrastructure software sector -- which includes security, network management and systems management and storage -- will become intertwined with three leading companies in the next 18 to 24 months," Wedbush Morgan Securities analyst Kevin Trosian wrote in a note earlier this week, mentioning

Computer Associates'


purchase of





acquisition of network management software company


and the Symantec-Veritas deal. "We anticipate consolidation of the best players, and a number of smaller players may be squeezed out."

In the Symantec-Veritas case, Ned Klingelhofer, a portfolio manager with SF Sentry Investment Group, said he believes that the Street has failed to recognize the likely future melding of security and storage into a combined sale -- and the opportunity to cross-sell products among Veritas' base of large corporate clients and Symantec's smaller business customers.

Still, "the stock is dead money for a while" until the combined company proves itself, Klingelhofer said of Symantec shares, which he owns. He believes that it could take a couple of quarters to satisfy investors.

But Kellner DiLeo Cohen & Co.'s Cohen suggested that the time line may be even shorter, noting other cases in which management has successfully convinced investors of the rationale behind the deal over time. "This thing still has months to run," Cohen said. "I would not draw too many conclusions based on what Symantec stock has done right after the deal was announced."