Reports say semiconductor giant aims to diversify into security software via Symantec purchase
For security geeks and market watchers, the Fourth of July fireworks came early when reports started circulating that semiconductor giant Broadcom is looking to buy security stalwart Symantec in a blockbuster deal that would reshape the IT data protection landscape.
The Lowdown: According to numerous reports first circulated by Bloomberg earlier this week, Broadcom is in advanced talks to acquire Symantec for somewhere between $13 billion and $15 billion. The deal, which will undoubtedly trigger intense regulatory scrutiny, would fold the security giant into a growing portfolio of diverse hardware and software companies under the Broadcom umbrella. Neither Broadcom nor Symantec is commenting on the acquisition reports. Sources for Bloomberg and the Financial Times say that, if negotiations are fruitful, a deal could be forged within weeks.
The Details: Broadcom’s intentions for Symantec are unknown, but the acquisition would follow a strategy laid out by founder Hock Tan and CFO Tom Krause to acquire diverse and distressed IT assets, reorganize and focus on core technologies, and squeeze out revenue and profitability. While Symantec is the largest pure-play security vendor in the market, it’s struggling under several managerial and competitive challenges.
What’s attracting Broadcom to Symantec, analysts say, is the imbalance in its books. Symantec reports 80% gross margins on its products, but only 8% net profit. More than one-third of its operating expenses goes to marketing. Despite the marketing investment, sales continue to struggle.
Under its optimization model, Broadcom reorganizes companies for optimal performance. It strips acquired companies down to their core assets and focuses on the assets that make the most economical sense. This is the model it applied when it acquired CA Technologies last year for $19 billion; in that deal, Broadcom focused on CA’s profitable mainframe business and shed the rest of the assets. Broadcom took the same approach when it acquired Brocade Communications in 2016.
The Impact: Should Broadcom succeed in acquiring Symantec, the deal will send shockwaves through the technology and security markets, as well as the security channel. CRN reports partners reactions, with most calling it a “strange fit.” Market analysts are more generous, believing the beleaguered Symantec needs stronger management and a rethinking of its product and go-to-market strategy. Specifically, some believe Symantec will improve under the Broadcom optimization model.
Not all analysts and market watchers are keen on the Broadcom bid. Some analysts say Broadcom is acting like a private equity firm that looks more like the corporate raiders of the 1980s, in that it’s more interested in discrete assets than the full body of a company. The characterization isn’t unfair, as, again, Broadcom’s acquisition history thus far is one of acquiring distressed companies, jettisoning the weak assets, and keeping the best of the lot.
Any deal for Symantec will likely draw regulatory scrutiny, which could reshape the particulars or scuttle the deal entirely.
Background: Symantec has been falling on hard times over the past two years. Its unwinding of the 2004 Veritas deal and the merger with Blue Coat in 2016 didn’t go as planned. Over the past 12 months, Symantec suffered setbacks as it announced internal audits of its financial reporting and sluggish sales. In May, CEO Greg Clark abruptly resigned amid continued declining performance. Richard Hill, a member of Symantec’s board, took over as interim CEO while the company searches for a permanent replacement.
Symantec maintains a significant footprint in the security market, but it’s not the powerhouse it once was. It, like other legacy security companies, is struggling to keep pace with technology innovation, disruptive competitors, and new business models. When CrowdStrike went public last month, many industry watchers took note that its first-day market value was basically equal to Symantec’s despite only generating one-tenth of the latter’s revenue.
Broadcom, a semiconductor company founded in Singapore, is following a strategy to build a diverse conglomerate of technology companies. The company’s leadership unveiled this strategy after the U.S. government derailed its $117 billion attempt to buy semiconductor rival Qualcomm in 2018. Broadcom, now headquartered in San Jose, says it will continue to look for technology opportunities. Analysts believe Broadcom wants to build a company that looks similar to General Electric, in that the diverse businesses operate as independent divisions under the corporate umbrella.
The Buzz: “The situation reminds us of the CA acquisition in mid-2018, which ultimately turned out be extremely successful under the Broadcom umbrella. From our point of view, there are striking similarities between Symantec and CA,” said Piper Jaffray analyst Harsh Kumar.
“Broadcom may need to sell parts of Symantec to fund the deal, given significant debt levels ($37.5 billion in debt, $5.3 billion in cash) and there would be clear implications,” said Macquarie analyst Sarah Hindlian. “We would assess the consumer segment…as the first choice for a sale, but its profit margins drive the consolidated asset (30% operating margin) and buyers may be scarce.”
“More specifically, we had noted that Symantec’s enterprise security operating margins of 12% in FY19 are downright poor for a business that’s doing $2.3 billion in annual revenue,” said Mizuho analyst Gregg Moskowitz. “While our model currently assumes 14% enterprise security margins in FY20 and 17% in FY21, we believe they could be significantly higher if Symantec (or Broadcom) does in fact focus on optimization.”
“That was the strategy behind the company’s acquisition of CA last year, a deal that seems to be working out pretty much as Broadcom had envisioned,” wrote analyst Charles King of PunditIT. “If it can follow a similar path with Symantec, the result should include enhanced financial stability – a critical point for a company focused on highly cyclical semiconductor markets.”
“Issues will likely be raised around Symantec’s competitive position, as well as the consumer exposure,” wrote Stacy Rasgon of Sanford C. Bernstein in a research note. “But at the same time, there is undoubtedly good that better management can achieve here.”