After last month’s discussions of a $15.5bn deal came to nothing following due diligence, Broadcom has announced its intention to acquire Symantec’s enterprise security business for $10.7 billion.
In addition to the announcement of the planned acquisition, Symantec also reported results for its first fiscal quarter of 2020 (ending July 5 2019), with revenue above guidance in both the Enterprise and Consumer segments.
2020 didn’t get off to the best start for Symantec: its FY 2019 results were disappointing, with net income at only $31 million compared to $1.1 billion in 2018. The announcement also coincided with the departure of CEO and President Greg Clark, which was perhaps the most prominent of a string of outgoing executives including fellow Blue Coat Systems alumni Nicolas Noviello (CFO) and Michael Fey (COO).
Added to the SEC’s investigation of possible accounting issues, Richard Hill, who took over as Interim President and CEO back in May, had his work cut out for him.
At the time, Hill attributed the miss on earnings to disappointing enterprise sales, and highlighted the continuing success of the Consumer Cyber Safety segment.
Since the end of FY 2019, Enterprise sales seem to have improved: CFO Vincent Pilette disclosed that the segment’s revenue this quarter was $615 million, up 9% year-over-year in constant currency. However, it contributed only 10% of the company’s total operating income, and guidance for the next quarter (by which time the acquisition is not yet expected to have closed) puts revenue from the Enterprise Security business at lower than Q1 – between $565 million and $600 million.
Hill made it clear in the earnings call with investors that he felt Broadcom would be considerably more successful in growing the Enterprise segment effectively, which would allow the remaining company to focus more on the Consumer Cyber Safety business.
“[The transaction] allows the Enterprise Security business to grow and compete on an enterprise platform with a worldwide sales and distribution reach which can service our existing customers,” said Hill in a press release.
“It also allows our Norton LifeLock business, a world recognized leader in consumer and small business cyber safety to operate independently and give investors a clear understanding of the growth opportunity and strong financial performance.”
The Symantec name is included in the Enterprise Security assets being sold, so the remaining company will be rebranding – no official news on that, but Hill repeatedly emphasised the value of the Norton franchise throughout press releases and the call with investors. The remaining company is also still looking for a permanent CEO, with both internal and external candidates being consulted. Hill clarified once again during the call that he will “be a relief pitcher for a little bit longer” but has no intention of staying on as CEO in the long term.
In addition, the company will be looking to make substantial savings as it tries to eliminate the approximately $1.5 billion it retains in stranded costs: selling off “underutilized assets such as real estate” will be one aspect of this; restructuring and layoffs will be another. Symantec has 12,000 employees today, and according to Pilette, the aim is to get down to 10,000 for the full company, and 2,500 as the long-term target for the remaining post-acquisition company.
Broadcom announced that it expected the acquisition to drive over $2bn of sustainable revenue, and over $1 billion of run-rate cost synergies within the 12 months following the close of the deal. Cross-selling opportunities with CA Technologies, which Broadcom acquired last year, were highlighted.
Although even the reduced $10.7 billion pricetag represents about 36 times the Enterprise Security business’s operating income for FY 2019 (as both Hill and Pilette repeatedly emphasised), Symantec’s status as one of the biggest names in the cybersecurity market seems to be the main source of value to Broadcom.
“Symantec’s enterprise security business is recognized as an established leader in the growing enterprise security space and has developed some of the world’s most powerful defense solutions that protect against today’s evolving threat landscape and secure data from endpoint to cloud,” said Broadcom CEO Hock Tan. “We look forward to expanding our footprint of mission critical infrastructure software.”
The chipmaker has been looking to diversify its business in recent years, with software being a key priority, which Tan hopes will reduce volatility. He says the company’s aim is to “build one of the world’s leading infrastructure technology companies across hardware and software”, with M&A playing a central role in the strategy – in addition to the acquisition of fellow software and security provider CA Technologies for $18.9 billion, Broadcom dropped $5.5 billion the previous year on networking specialist Brocade Communications Systems.
Broadcom says that it expects 29% of its total revenue to come from software once the Symantec acquisition closes, so if the focus is on diversification rather than simply acquiring a money-maker, the purchase makes sense for a company with the reach, resources and infrastructure of a player such as Broadcom.
But with ‘next generation’ endpoint security companies such as Crowdstrike attracting more and more investment and customers away from more ‘traditional’ providers, it’ll be interesting to see whether the acquisition lives up to Broadcom’s expectations.