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Can the new Symantec make merging look easy?

Your data hopes so

Analysis Symantec and Veritas have provided a welcome reminder that all doesn't have to look hideous in the rather quickly consolidating software market.

Unlike the Oracle/PeopleSoft debacle, the merger between Symantec and Veritas took place largely behind closed doors. Word of the deal leaked out earlier this week, but the speculation seemed to have little effect on its outcome. The New York Times predicted a $13bn agreement, and it ended up coming in at $13.5bn. What's $500m between friends?

By early appraisals, the meat of the Symantec/Veritas merger looks as smooth and nicely marbled as its financial underpinnings. The firms don't really have any overlapping products, and they now stretch nicely from the consumer all the way up to the most demanding corporate customer. If data protection is what you want, then the new Symantec is the company you should call.

The deal, however, might not be as good as it seems.

Symantec and Veritas certainly don't face similar issues to Oracle and PeopleSoft. Oracle Chief Larry Ellison was quite comically forced to console both Oracle and PeopleSoft customers at the recent OpenWorld conference. He promised that Oracle would complete work on the new version of PeopleSoft's software, and then the two companies would merge their code to create a wonderful new product. Ellison promised that customers would easily be able to upgrade to this Oracle/PeopleSoft product, that it would arrive on time and that it would be superior to any business software ever produced. That's a lot of optimism to swallow.

Over at Symantec and Veritas, the scene looks less deus ex machina dependent.

Symantec will keep working on its anti-virus and network security software. This business has boomed recently and should do so for some time to come. Security is priority number one with many consumers and corporate customers.

Veritas too should keep plodding along. Its back-up business for all operating systems remains strong. In addition, Veritas has done a nice job over the past couple years tuning its file system and volume manager products to work well with non-Sun Solaris operating systems, namely Linux, HP-UX and AIX. Overall, the storage software market is enjoying solid, double-digit growth.

The combined company, however, will be under tremendous pressure to maintain growth on both sides of its business.

Symantec, despite its denials, faces very real threats in the consumer security software market. Microsoft has shown interest in developing its own security software, and service providers are starting to offer anti-virus software, ad blockers and spyware checkers for free. Symantec is in as good of a position as any vendor to face these battles, but it will be a difficult tasks nonetheless.

"This is not a defensive move by any stretch of the imagination," Symantec's CEO John Thompson told analysts. "It's an offensive move."

If you say so.

Veritas is up against larger challenges. It's still in the process of integrating software it has acquired from numerous vendors over the past two years. Veritas has been busily trying to build out a server software management portfolio to complement its storage applications. Now it will have to stay focused on these goals, while being folded into Symantec.

A real positive for Veritas in this deal is that it remains a neutral vendor. The key to its success has been that it can both partner and compete with EMC, IBM, HP, Microsoft and Sun Microsystems.

Still, you have to wonder if Veritas would not have been better suited as part of one of these large vendors. All of the companies listed above are dead focused on wooing large corporate customers and know what it takes to close big software deals. They also know what is expected of an enterprise software company.

One wonders a bit if Symantec's culture will drive this same kind of attack. Veritas CEO Gary Bloom will serve as President and Vice Chairman of the new Symantec and that should help the Veritas side of the house stay hungry, but we question how long Bloom will remain at the new firm. He seems to relish the CEO role.

There are also large concerns for Symantec shareholders.

Unlike Oracle's cash buy of PeopleSoft, Symantec acquired Veritas in an all stock transaction. This makes good use of Symantec's rather high share price but places the cost of a failed acquisition in the hands of investors.

Veritas is expected to post revenue of $2.2bn in 2005, so Symantec is paying close to six times future sales for the company. Analysts see Veritas increasing sales by 13 per cent this year and 10 per cent the next. By contrast, Symantec is forecasted to see sales rise somewhere in the 35 per cent range. Symantec shareholders, however, only hold 60 per cent of the new company, which means they've given up a 40 per cent stake only to be saddled with an underperforming storage software unit.

"While the combination of the two companies makes longer term strategic sense, we believe near-term concerns will weigh on the stock," Merrill Lynch wrote in a research note. "Quite simply, we think investors view the Veritas as diluting Symantec's high growth and adding a significant level of execution risk."

Not surprisingly, Symantec's shares have fallen from around $32 per share to $25 per share since the deal was announced.

Still, kudos go to both companies for coming up with a creative attack. There's a lot of potential gains to be had if Symantec and Veritas can merge smoothly and aggressively. The road ahead won't be easy, but it should be interesting. ®

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