Symantec Acquires LifeLock To Offer Comprehensive Security

| About: Symantec Corporation (SYMC)

Summary

Security company Symantec will acquire LifeLock identity protection service for $2.3 billion.

The combination rationale is based on increased cross-selling opportunities and longer customer lock-in.

I'm positive on the transaction for Symantec, though the proof will be in the execution throughout 2017.

Quick Take

Cyber security firm Symantec (NASDAQ:SYMC) has announced an agreement to acquire identity protection company LifeLock (NYSE:LOCK) for $2.3 billion, or $24 per share. The combination of Symantec's Norton Suite and LifeLock aims to provide consumers with a comprehensive solution and the company with potential for cross-selling and increased revenues.

I'm positive on the acquisition; both companies target similar consumers, cross-selling should be a no-brainer, and Symantec really needs LifeLock to shore up Norton's falling revenues.


Target Company

Tempe, Arizona-based LifeLock was founded in 2005 by current Vice Chairman Todd Davis and Robert Maynard. The identity theft protection company provides consumers access to its subscription service, which detects potentially fraudulent activity, alerts members to that activity and assists them in restoring their identity details.

The company sells its service directly as well as through partnerships including:

  • Affinity Programs
  • Breach Solutions
  • Employee Benefits
  • Financial Services
  • Insurance Providers
  • Subscription Services

In March 2016, Hilary Schneider was appointed president and chief executive officer. She was previously executive vice president of Yahoo Americas.

Below is a brief explainer video:

(Source: LifeLock YouTube)

Consumers can choose from three plans as follows:

Standard - $9.99/mo or $109.89/yr

Advantage - $19.99/mo or $219.89/yr

Ultimate Plus - $29.99/mo or $329.89/yr

The plans include a $1 million service guarantee.

In its most recent reporting period for the calendar year 2015, LifeLock recorded 4.2 million consumer paying members and consumer revenue growth of 24.5% vs. prior year. The monthly average revenue per member was $11.97 at the end of 2015.

Enterprise customers accounted for a small but growing segment of customers.

Acquisition Rationale

The combination pulls together Symantec's Norton consumer online security service with LifeLock's consumer identity protection service, so the combined entity will have greater cross-selling opportunities. The ability to cross-sell is a big deal for online subscription services since it can dramatically lower customer acquisition costs in the case of new combinations such as this where the two companies can integrate and then cross-sell, while increasing customer retention.

Since both firms are in the consumer security sector, presumably the integration and company culture risks will be minimal.

Finally, the consolidation will enable the companies to provide a more comprehensive offering to those consumers seeking all of their security protection needs from one vendor.

Terms And Commentary

Symantec is paying $24 per share for LifeLock, approximately a 15% premium to LOCK's closing price before the announcement. Symantec is paying for the purchase from cash on hand and the issuance of $750 million of new debt.

LOCK's most recent full-year results (2015) were $587 million revenue and $85 million in operating losses. It has a price/sales multiple of 3.46x currently valued. By comparison, Symantec generates in excess of $4 billion in annual revenue, so the LOCK acquisition will immediately increase the revenue base by 15%.

Symantec is acquiring LifeLock's 4.2 million customers for $2.3 billion, for an average cost per customer of $547. We don't know the average lifetime value of each LifeLock customer. However, if we use a three-year assumption as an average and considering LifeLock averages $12 per customer per month per its 2015 10-K, Symantec is effectively paying $2.3 billion for $1.8 billion in revenues.

So, Symantec is not getting LifeLock on the cheap and will have to pay for the acquisition by cross-selling Norton security services to LOCK's customer base, and vice-versa. Unfortunately for the two companies, consumer security software is the only security segment showing YoY declines, with Gartner estimating it at 5.9% in 2015 vs. an overall security industry growth of 3.7% over the prior year.

Additionally, the Gartner report stated:

74% of Symantec's revenue came from the consumer and endpoint protection platform, EPP, categories, which collectively declined 7% year on year and were a major contributor to Symantec's revenue decline.

So, Symantec appears to be diversifying its revenue streams with its LOCK acquisition. And none too soon.

Symantec's Norton suite faces commoditization from free consumer anti-virus service providers such as Avast (Private:AVST), Panda, Bitdefender and Check Point (NASDAQ:CHKP). While businesses still have to pay for security, it can't be long before a sales-hungry consumer provider begins to provide certain security features free to businesses as well. A commoditizing purchasing environment is never a desirable thing for software vendors.

To its credit, Symantec is bold in its acquisition strategy while it still has the currency to do so. For this combination, growing its revenues while lowering costs will be the true test of its value. Investors will need to watch the revenue growth and customer retention rates carefully in 2017 to see how well the two companies combine and execute after the transaction is finalized.

The acquisition is scheduled to close in 1Q 2017.


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