Can Symantec Survive Its Reorganization?

Symantec has had a rough year, and activist investors and private equity firms might try to break up or sell the firm. Can Symantec succeed with its reorganization and survive?

Jul 7, 2014 at 6:00PM

It's been a rough year for software maker Symantec (NASDAQ:SYMC). After a period of decreasing revenue, the company embarked on a round of cost-cutting, and and an initiative to bring more development in-house, rather than relying on acquisitions.

Then, in March, the board fired CEO Steve Bennett over concerns of ineffective leadership and a failure to jump-start growth, according to the Wall Street Journal. Several weeks later, Reuters reported that the situation was attracting activist investors and private equity firms, who might be interested in the breakup or sale of the firm. What's going on with the company right now, and what might the future bring?

Changes at the top
Michael Brown, a member of Symantec's board, has taken over as interim CEO while the board searches for a permanent replacement. But Bennett's firing was emblematic of further shakeups at the top of Symantec's management, as five senior executives have left since last July. As an example, the new CFO, Thomas Seifert, was appointed only a week before Bennett was fired.

The current management says that there is talent and stability within the company in spite of the extensive changes at the top. In the first 40 days since Brown took over as interim CEO, the new team devised a detailed plan to move the company forward, which surprised analysts by its ambitious revenue and operating margin goals. When asked what leeway the incoming CEO will have to deal with such an existing plan, Brown answered that the board will be flexible, but that any CEO will be interested in growth and margin improvements that the new plan promises.

Product pruning and margin expansion
A major part of the new plan revolves around keeping only those products that can be optimized for margin improvements or growth. Businesses that do not meet these criteria will be de-emphasized, or closed altogether. Crucially, management also said that Symantec will be focusing on the enterprise segment from now on.

All of this has direct bearing on the company's most recognizable product, the Norton consumer security suite, which seems destined to become a true cash cow. Brown said that Norton is a great business for Symantec, but that it does not warrant continued investment at the same level as previously.

In general, anti-virus software is decreasing in its effectiveness as a way of blocking complex security threats, while complementary technologies, such as network security, are becoming more important. Symantec might have missed its chance to expand into these related markets, which are now dominated by companies such as Juniper Networks and F5 (NASDAQ:FFIV), which has seen 22% year-over-year growth in the most recent quarter, and views security as its major growth driver.

What this means for investors
Symantec shares have been underperforming the S&P 500 for years, but the current situation might be good news for investors. Given Symantec's history of acquiring companies, but failing to fully integrate the new products, the product reevaluation, with a focus on growth and margin expansion, is a step in the right direction. Additionally, free cash flow is expected to increase in 2015 from its 2014 level of $1.02 billion, and management has pledged to return approximately $900 million of this to shareholders through dividends and stock repurchases.

Furthermore, if activist investors have their way, parts of the company might also be sold off, leaving a smaller, but more profitable, Symantec. When asked about "other options the board might be considering to create value," Brown simply replied that the board periodically evaluates possible changes to the company, and that it will remain open-minded.

Finally, it is possible that all of Symantec will be broken up or acquired. The other major anti-virus provider, McAfee, was sold to Intel (NASDAQ:INTC) in 2011. Thanks to Intel's deep pockets, McAfee has been able to make investments in internal development and focus on new, emerging areas of cybersecurity. A big buyer like Intel doesn't sound like a bad outcome for Symantec as a company, and it might also bring a windfall to its investors.

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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of F5 Networks and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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