Symantec Corp. investors found some immediate relief after the company announced a $10.70 billion deal to sell its enterprise software business to Broadcom Inc., but some analysts and investors remain skeptical.
The deal solves some of the problems that have plagued Symantec since it split from data-management company Veritas Technologies LLC at the beginning of 2016 and shifted its product strategy toward enterprise cybersecurity with the acquisition of Blue Coat. The transaction sheds a business that has struggled to maintain positive growth, though analysts simultaneously question the growth prospects of the remaining consumer-focused segment. For Broadcom, the deal is an extension of a software strategy that analysts and investors are warming to, though concerns remain.
"Deal activity over the past two years has deviated from Broadcom's legacy acquisition model," Fitch analysts said in an Aug. 12 note downgrading the company's outlook to "negative" from "stable."
However, Fitch said Broadcom's shift to software products through M&A will provide financial stability for the historically hardware-focused semiconductor company, particularly as the handset market remains challenged by U.S.-China trade tensions. Broadcom's three largest acquisitions in its history have all been software deals, and each occurred in the last three years. Symantec will be the company's second-largest transaction behind the $21.78 billion acquisition of CA Technologies, a provider of information technology management software and services.
"With both Symantec and CA under one umbrella, Broadcom should become a much more powerful player in the software world with this 1-2 punch along with its chip empire, although both core software assets continue to lack any meaningful growth/secular tailwinds, which remains a lingering worry for Broadcom investors," Wedbush analyst Daniel Ives said in a note on the deal.
The lack of growth in its enterprise software segment has stymied Symantec's investment prospects since it expanded to that business with the acquisition of Blue Coat. Ives and other analysts note that enterprise cybersecurity remains an important growth industry, but Symantec has struggled to grow its share in that business due to execution issues related to sales and marketing as well as corporate-level distractions, such as an internal audit, activist pressure and the sudden resignation of its CEO.
Prior to those events, investors bullish on enterprise cybersecurity piled into Symantec following the Blue Coat announcement and then again when it acquired consumer-focused cybersecurity asset LifeLock Inc., but the company erased those gains with a 35% drop in the stock after the internal audit was announced.
Financial performance in recent quarters underscores investor concerns about Symantec's ability to maintain a strong growth rate within its enterprise segment. The enterprise segment saw negative revenue growth throughout 2018, bottoming out in the September quarter with a drop of 16.3% year over year to $574 million. The Norton LifeLock consumer segment fared better in 2018 with positive growth rates, but since the March quarter of 2018, revenue growth has fallen from a high point of 33.6% year over year to negative 1.3% in the March quarter this year.
However, Symantec recently revealed stronger earnings for the June quarter, and executives argued that the remaining consumer-focused segment will offer reliable cash flow, consistent growth in the mid-single digits and a consistent shareholder-return strategy.
"We view the sale ... as a strong outcome for the business as it unlocks shareholder value without having to take on the risks in restructuring the business," William Blair analyst Jonathan Ho said in a note on the transaction. "We believe Symantec's surviving consumer business can be a mature free cash flow engine."
Ives, however, remains a bit more uncertain about Symantec's business after the sale is completed.
"While this transaction has the potential to unlock some potential leverage in the Consumer business, we believe this is still a major prove-me story with a lot of heavily lifting ahead," the Wedbush analyst said.
As of Aug. 13, Broadcom shares were up 4.7% from the company's Aug. 8 close, while Symantec's shares have nudged up just 0.9% in the same period.