A year ago, Broadcom's (AVGO) shares tumbled after the company made a large and stunning deal to buy a decades-old enterprise software firm. However, they eventually rebounded as Broadcom outlined its strategy for making the deal pay off and began successfully executing against it.
The fact that Broadcom's $18.9 billion 2018 deal to buy CA Technologies has to date been going well is likely a big reason why its shares only saw a 3.5% Wednesday decline following a Bloomberg report stating the company is in "advanced talks" to buy security tech firm Symantec (SYMC) , rather than something like the 14% drop it witnessed the day after news of the CA deal broke. CA appears to have made Wall Street relatively less pessimistic about Broadcom's ability to make a Symantec deal work than it otherwise would be.
Also possibly limiting Broadcom's decline: Symantec, which sports a $15.6 billion market cap following the 14% Wednesday gain it witnessed thanks to Bloomberg's report, trades at fairly low multiples relative to many IT security peers. Even after Wednesday's gains, Symantec only goes for 15 times a fiscal 2020 (ends in March 2020) EPS consensus of $1.69, and sports an enterprise value (market cap plus net debt) that's only equal to about 3.5 times expected fiscal 2020 billings of $4.9 billion.
And just as Broadcom has moved aggressively to boost CA's bottom line by slashing spending, divesting non-core businesses and focusing heavily on inking large, "all-you-can-eat," software licensing deals with CA's biggest customers, Hock Tan's company might see a lot of room to streamline Symantec's business. For now, Symantec's product line includes a very long list of security software, services and appliances for enterprises, as well as a large consumer security unit that includes both the age-old Norton antivirus software business and the LifeLock ID theft-protection services business.
Broadcom, which has long been seen as having a private equity mindset when it comes to M&A, could also move to more generally cut Symantec's spending in areas such as sales, R&D and G&A. And given that Symantec has seen quite a lot of management turmoil and turnover during the past few years, Broadcom could see an opportunity to improve Symantec's execution by overhauling its leadership.
But before one assumes that Broadcom's success to date with CA guarantees a similar outcome for a Symantec acquisition, the differences between the companies should be taken into account.
While CA was no one's idea of a high-growth company prior to its acquisition by Broadcom, it was still seeing a measure of growth; in its fiscal 2018 (it ended in March 2018), CA's revenue rose 5% to $4.24 billion. By contrast, Symantec's revenue fell 4% in its recently-ended fiscal 2019 to $4.76 billion, thanks to an 11% drop in Enterprise Security segment revenue to $2.32 billion. Billings, meanwhile, dropped 11% to $4.86 billion.
Such top-line pressures were a key reason why I felt Symantec's stock looked like a value trap following a pretty disappointing March quarter earnings report. Of course, I wasn't expecting at the time that Broadcom would make a bid for the company.
Despite its recent top-line pressures, Symantec is forecasting that its revenue will stabilize in fiscal 2020. However, the midpoint of its full-year revenue guidance range only implies 1% sales growth at a time when security IT spending is growing at a high-single digit clip. Regardless of how the company spins it, Symantec is clearly losing share to rivals.
And when comparing the long-term outlooks for CA and Symantec's enterprise businesses, one can't ignore the fact that over half of CA's revenue prior to the Broadcom deal -- and likely a larger percentage now -- came from a mainframe software business that (although seeing little growth) features limited competition and has a highly sticky customer base. Symantec's enterprise business, on the other hand, is highly exposed to very competitive security tech markets featuring rivals ranging from Cisco Systems (CSCO) to Palo Alto Networks (PANW) to Proofpoint (PFPT) to Crowdstrike (CRWD) , not to mention a slew of well-funded startups.
Given how it has handled the CA deal thus far, it's certainly possible that Hock Tan & Co. can make a Symantec acquisition pay off despite such challenges, particularly in light of the subdued multiples that Broadcom would likely be paying for Symantec. But any deal would clearly feature its share of risks.
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