Will Symantec Benefit By Separating Its Storage Software Business?

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SYMC
Symantec Corp

Symantec (NASDAQ:SYMC) is reportedly in advanced talks to spin-off its storage software and security software businesses into independent entities, according to a recent Bloomberg report. The world’s largest security software vendor entered the storage management software market in 2004 with the acquisition of Veritas Software for approximately $13.5 billion, the largest software industry merger up to that date, in an all-stock deal. Symantec reasoned that the combined entity would be uniquely positioned to deliver information security and availability solutions across all platforms, from the desktop to the data center, from consumers and small businesses to large organizations and service providers. [1]

However, Symantec has failed to gain leverage on any synergies between its core business and Veritas after the acquisition. Over the last five fiscal years, sales from storage software registered a paltry 1.5% annualized growth rate, increasing from $2.30 billion in FY08 to $2.48 billion by FY13. During the same time frame, Symantec’s remaining business units registered an annualized growth rate of nearly 4.4%, from $3.57 billion in FY08 to $4.43 billion in FY13. If Symantec goes ahead with a spin-off of the storage management software business, it would add to the trend of tech majors breaking themselves into smaller pieces to become more nimble and focused.

According to our model, the storage accounts for 29% of the valuation, or about $4.6 billion. We estimate that it will generate $2.6 billion in revenue and $738 million in EBITDA in calendar year 2014.

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We have a Trefis price estimate of $25 for Symantec, about 6% ahead of its current market price.

See our complete analysis of Symantec

Storage Software Business Spin-off Could Enhance Value for Security Software

One advantage through a spin-off of the storage management software business for Symantec is a reiterated focus on its core business line, security software. As noted above, sales from other business lines have grown at roughly three times the growth rate of the acquired Veritas business line over multiple fiscal years. In part, this sluggish growth in sales was attributable to the delay in integrating teams from both companies. R&D teams from Veritas and Symantec operated independently for almost three years post-merger, when code sharing and product line integration began taking place. [2]

From an industry standpoint, the storage management business is intensely competitive with the presence of deep-pocketed players such as EMC, HP, Oracle and IBM. Compared to these players, Veritas does not have the resources to keep pace with product launches in a rapidly evolving technological environment. Since the acquisition of Veritas, Symantec has tried to diversify into new product areas through the launch of Backup Exec & Enterprise Vault products and NetBackup appliances. However, products from Backup Exec and Enterprise Vault failed to gain traction and continue to trim any gains from its NetBackup appliance product line.

Given the weak sales performance over multiple fiscal years from the storage management software division along with the rapidly evolving industry landscape, we believe spinning off the division into a separate entity could unlock greater value for Symantec’s core security software business. The company is already reinvesting cash profits from mature product lines such as Norton into niche product areas such as mobile security, enterprise and data center security, business continuity and information fabric solutions. By separating these two entities, Symantec could emphasize on its organic business segments such as consumer and enterprise security solutions, wherein it has a market leading position, and enhance value contribution from these segments.

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Notes:
  1. Software Industry Leaders Symantec and VERITAS Software To Merge, Symantec Press Release, December 2004 []
  2. Three Lessons From Symantec-Veritas Merger, The Var Guy, October 2008 []