With Veritas’ Operational Separation Complete, What’s Next for Symantec?

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SYMC
Symantec Corp

Leading security software vendor Symantec (NYSE:SYMC) is likely to focus on acquisitions and R&D investments now that the divestiture of its information management business, Veritas, approaches.  In fact, the company has told customers its operational separation  is complete.  The legal separation of Veritas, however, will take place by the end of this year upon the completion of the sale process to the private equity fund, Carlyle. [1] The sale will transform Symantec into a pure-play security vendor and allow it to focus on growing its enterprise security business, which we believe to be the next growth frontier for Symantec. (Read: Opportunities Abound for Symantec as a Pure-Play Security Software Vendor)

The Veritas sale will provide Symantec with $6.3 billion in after-tax cash, of which about 40% is planned to be returned to shareholders through share buybacks and dividends. The company plans to utilize the remaining cash for acquisitions and R&D investments in its enterprise security business. Specifically, Symantec plans to expand its presence in threat protection, information protection and cybersecurity services segments. [2] The company is not planning acquisitions in any other segments, which is an encouraging indication of Symantec’s newfound focus on reviving its enterprise security business.

Our price estimate of $26 for Symantec is about 20% higher than its current market price.

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See our complete analysis for Symantec here

Endpoint Protection and DLP Likely to Lead the Way

Endpoint protection (threat protection) and Data Loss Prevention (information protection) are currently the fastest growing segments in Symantec’s enterprise security software business. Both of them achieved double digit non-GAAP revenue growth in fiscal 2015, beating the respective industry growth rates. (Read: Flailing Consumer Security Segment Drags Down Symantec’s Revenues in Q4) Symantec is currently the leader in endpoint protection as well as the DLP market, but is keen to extend its market share in these growing segments.

Endpoint protection is valued at over $9 billion and is one of the largest segments in the enterprise security sector. [3] On the other hand, DLP is a relatively nascent segment at $643 million and Symantec accounts for nearly half of its global market. DLP is one of the fastest growing segments in enterprise security. In 2014, the DLP market expanded at 15.8% year on year. [4] In comparison, Symantec’s revenues from DLP grew by 30% year on year in the fourth quarter of fiscal 2015, making it by far the fastest growing segment for the company. [2] Since these two segments form the largest and fastest growing markets in the enterprise security business, it is logical for Symantec to consolidate its position in them through acquisitions.

Acquisitions Also Planned in Cybersecurity Services

The third segment which Symantec has identified for potential acquisitions is cybersecurity services. Cybersecurity services, or managed security services, is estimated to be valued at $14 billion and is forecast to grow at an annual clip of nearly 16% through 2020. [5] Symantec stepped up its presence in managed security services market earlier this year by expanding its Incidence Response Service to several new markets. [6] The company now plans to further expand its product offerings in this segment through acquisitions.

Given the currently high valuation of most tech companies, Symantec is likely to opt for technology-accretive purchases rather than revenue-accretive acquisitions. In other words, we expect Symantec to acquire relatively smaller companies whose technology it can leverage for expanding its own product base. This would be instead of paying large amounts for companies with existing high revenues. The company also plans to invest over $1 billion in R&D for the enterprise security business to pair its acquisitive strategy with organic growth. [2]

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Notes:
  1. Symantec Communication, October 3, 2015 []
  2. Symantec CEO: Partners Can ‘Definitely Expect’ Security Acquisitions After Veritas Sale, CRN, October 9, 2015 [] [] []
  3. IDC: Top 5 Corporate Endpoint Security Leaders, CRN, August 28, 2014 []
  4. Worldwide Security Software Market Grew 5.3 Percent in 2014, Gartner, May 27, 2015 []
  5. World Managed Security Services Market – Opportunities and Forecasts, 2013 – 2020, Allied Market Research, April 2015 []
  6. Symantec Expands Incident Response Services Globally, Symantec Press Release, April 13, 2015 []