The Lesson Of Symantec And Blue Coat

| About: Symantec Corporation (SYMC)

Summary

Symantec is paying $4.6 billion for Blue Coat.

Blue Coat's CEO will run the combined company.

Investors want cloud security more than device security.

Expect more deals, and a better valuation.

Cloud security matters more than devices. It's a newer field, a broader field, it's where the action is. That's the lesson in Symantec (NASDAQ:SYMC) buying Blue Coat for a reported $4.65 billion and installing Blue Coat CEO Greg Clark on top of the combined company.

Symantec was best known for years as the company behind the Norton line of PC anti-virus tools, a name to conjure with in the 1980s but now almost lost in history. Blue Coat, previously called Cache Flow, is a network security company that now bills itself as a cloud security outfit.

Symantec had a $10.65 billion valuation before the deal, so this one was a stretch. It was achieved with the help of Silver Lake Capital and Bain, which are buying $1.25 billion in convertible notes between them while the company moves $2.8 billion in debt and clears some of nearly $6 billion in cash off its balance sheet.

Symantec stock barely budged in overnight trading, but you can expect some bids Monday because this is the kind of security firm investors want. On Friday Symantec was worth $4.5 billion plus its cash, or less than 1.5 times sales. A press statement on the transaction indicates that Symantec will have $4.4 billion in revenue going forward, which means it probably paid about 5.5 times the $800 million in revenue Blue Coat was generating as a venture-backed "unicorn." Before selling Blue Coat had filed a registration statement to go public.

Compare the price being paid here with the valuation accorded Fireeye (NASDAQ:FEYE), $2.51 billion in market cap with revenue of $623 million, or Palo Alto Networks (NYSE:PANW), worth $11.45 billion on trailing year sales of $928 million. This is the league the new Symantec wants to play in.

Symantec may need Clark as much as it needs Blue Coat's products. In January Symantec had sold its Veritas unit to Carlyle Group, revealing serious problems with Symantec management (it took $800 million less than it originally announced) that hopefully Clark can address. The company had said before the deal it was looking for a new CEO.

This should tell you how Symantec's old management was performing. The company originally bought Veritas in 2005 for $13.5 billion. It split security from information management, then sold the information management unit for just $7.4 billion to Carlyle 10 years later.

The bottom line for investors is that if you're buying Symantec today you are basically buying Blue Coat, and betting on Clark's ability to get performance out of the pieces or get a good price for what does not fit. Clark, an Australian, is a serial entrepreneur who built and sold three different companies before joining Blue Coat in 2011.

The guess here is that this won't be the last piece of news to come out of Symantec in 2016, but that when everything is done you may have a company worth buying.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.