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Morningstar | Broadcom Reportedly in Talks to Buy Symantec in Questionable Move Underscoring Foray Into Software

On July 2, Bloomberg reported that Broadcom is finalizing a deal to buy Symantec, with the Financial Times further reporting that the transaction would be for more than $15 billion. Nearly a year after announcing a deal to acquire CA Technologies for $18.9 billion, Broadcom is pursuing another software firm, thus solidifying its strategy of acquiring software in lieu of semiconductor or hardware firms. This potential tie-up bears an uncanny resemblance to the ill-fated Intel-McAfee combination in 2010, with the latter ultimately spun back out of Intel in 2016 after the chip titan failed to successfully incorporate the security software vendor. We question whether a similar fate may be in store for Broadcom and Symantec. One manner in which Broadcom could reap benefits from a deal would be to streamline Symantec's operations by focusing primarily on its enterprise solutions, in our view. Symantec does fit the bill of a low-growth business with solid free cash flow ($1.3 billion over the trailing 12 months), characteristic of Broadcom's past dealings. We are maintaining our $300 fair value estimate for narrow-moat Broadcom.

We are also maintaining our $17 fair value estimate for no-moat Symantec amid the rumors; we will adjust our valuation if the rumors become factual. Symantec shares rose 22% in after-hours trading on the potential acquisition news, which we think shows investors anticipating an exit strategy for a firm that has recently struggled, has an ongoing Securities and Exchange Commission investigation into accounting abnormalities, and is searching for its sixth CEO in a decade. A $15 billion valuation would represent only a 10% premium to Symantec's market capitalization before the reports, which appears reasonable based on recent technology deals.

While Symantec's evolution in the enterprise space is working toward a distinct strategy, the company has lacked consistency at the helm, and we expect internal disruptions and the reliance on consumer profits to inhibit sustainable operating results. Symantec's combination of consumer cybersafety and enterprise security makes it the largest pure-play security vendor. In the consumer space, the company's Norton cybersecurity solutions and LifeLock identity theft protection are prominent brands that offer individuals and families security from malicious threats on devices and their personas. Symantec's enterprise solutions are well regarded and cover products and security services for endpoints, email, networks, and cloud. The company has embraced the notion of providing a security platform as IT and security teams try to reel in the proliferation of security vendors deployed within their networks. Symantec has relied on its presence in the cutthroat consumer market for operating profits, and we expect cloud-based enterprise security to help diversify profit inflows. If Broadcom acquires the firm, it may be able to accelerate Symantec's enterprise ambitions.

We think any deal would be funded via debt. At the end of Broadcom's most recent quarter, ended May 5, the firm held $5.3 billion in cash and equivalents compared with $37.5 billion in total debt. Although the firm continues to generate healthy cash flow ($2.7 billion last quarter in operating cash flow), we think the sizable net debt position (which would undoubtedly get larger) could be a concern as CEO Hock Tan indulges Broadcom's voracious acquisitive appetite. From a regulatory standpoint, given that the CA deal was approved in a reasonable time frame, we don't believe this potential combination will face any national security or geopolitical challenges.