Symantec (NASDAQ:NLOK), the maker of Norton security services, recently agreed to buy security hardware, software, and service provider Blue Coat for $4.65 billion in an all-cash deal. Blue Coat, which was acquired by Bain Capital for $2.4 billion last year, had filed to go public earlier this month.
According to Blue Coat's S-1 filing, its GAAP revenue fell 5% to $598.3 million in the fiscal year ending on April 30 due to deferred revenue writedowns related to Bain's takeover. This means that Symantec is paying a hefty premium for Blue Coat at nearly 8 times sales. On a non-GAAP basis, which excludes those charges, sales improved 17% to $755 million. Blue Coat remains unprofitable, with a GAAP net loss of $289.1 million last year, but its adjusted EBITDA rose 3% to $222.8 million.
Blue Coat CEO Greg Clark will also become Symantec's new CEO after the deal closes. The company announced in April that CEO Michael A. Brown would step down after a successor was found.
Why Symantec bought Blue Coat
Acquiring Blue Coat will add over 15,000 enterprise customers to Symantec's current customer base of around 370,000 clients. Symantec claims that the acquisition will combine its "leading threat telemetry with Blue Coat's networks and cloud security offerings" to protect servers, emails, and web transactions.
Simply put, Symantec needs Blue Coat because its core antivirus business has been dying a slow death over the past decade. Two years ago, a Symantec executive declared that traditional antivirus solutions were "dead" due to the rise of sophisticated attacks that rigid antivirus solutions couldn't keep pace with. Moverover, the rise of mobile and connected devices enabled hackers to attack anything with an active Internet connection.
Symantec's core security products protect PCs, data centers, and emails. Blue Coat's products protect networks and cloud services, so the two companies' businesses don't really overlap. Symantec claims that the combination of those services in end-to-end packages will enable it to protect a wide range of platforms which would typically require "eight to ten" different security vendors. The acquisition will also give Symantec a combined staff of 3,000 engineers and researchers to better counter hackers worldwide.
Symantec would get a sales and earnings boost
Symantec posted a dismal fourth quarter earnings report last month. Revenue fell 6% annually to $873 million, missing estimates by nearly $6 million due to weak enterprise spending and the aforementioned limitations of its core business. Non-GAAP earnings fell 24% to $0.22 per share, missing expectations by a penny. The company also slashed its quarterly dividend in half, from $0.15 to $0.075 per share, and unveiled a $400 million cost savings plan.
At the time, Symantec expected its GAAP revenue to fall 1% to 3% for the full year. Non-GAAP EPS was expected to come in between $1.06 to $1.10, which would have represented 3% to 7% growth. Symantec expects the Blue Coat acquisition to generate $150 million in run-rate synergies to complement its cost savings plan, which could together boost non-GAAP earnings in fiscal 2018 to $1.70 to $1.80. That would be much higher than the average analyst estimate of $1.39, which hasn't been updated to include Blue Coat's earnings.
More acquisitions on the way?
Symantec took on new debt to fund the Blue Coat acquisition, but it could buy even more cybersecurity companies to expand its reach. A recent Bloomberg report claims that threat prevention company FireEye (NASDAQ:FEYE) snubbed Symantec's takeover bid in February.
This means that Symantec could eventually compete against networking giant Cisco (NASDAQ:CSCO), which is also frequently mentioned as a potential suitor for FireEye, in the market for bundled end-to-end security solutions. Cisco's security portfolio, which grew substantially over the past few years with its acquisitions of SourceFire and ThreatGRID, generated $1.4 billion in the first nine months of fiscal 2016.
Another potential target for Symantec is CyberArk (NASDAQ:CYBR), which protects privileged accounts that are exploited internally by hackers or disgruntled employees. Earlier this year, Symantec, FireEye, and several other tech companies joined CyberArk's C3 Alliance, which integrates CyberArk's privileged account solutions into other security platforms.
A pricey but necessary move
Symantec definitely paid a premium for Blue Coat, but it was a good strategic acquisition which will help it offer end-to-end security solutions for enterprise customers and widen the company's moat against diversified rivals like Cisco. It's not a magic bullet that will fix its core problems overnight, but it's a good move which could help the aging tech giant finally start moving forward again.