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Morningstar | Starboard Value Takes Stake in No-Moat Symantec; Maintaining $19 FVE

On Aug. 16, activist investor Starboard Value took a 5.8% stake in Symantec, seeking five board seats on the company's 11-person board. Given that our valuation is based on our expectations for revenue and earnings over the next five years, we are maintaining our $19 fair value estimate and no-moat rating, as we have no indication that Starboard’s involvement will alter Symantec’s capital structure or go-to-market strategy.

Symantec has been plagued by guidance reductions the past two quarters as well as an internal audit investigation regarding its accounting practices. Its 10-K filing for fiscal 2018 has been delayed indefinitely. Amid slowing growth and a muted profitability profile, Symantec has pushed to cut its workforce by as much as 8%. We’ve cautioned investors regarding the uncertainty in this company and think they should be cognizant of the declining GAAP earnings for fiscal 2019, the current fiscal year. Slowing growth and the divestiture of the profitable web security and public key infrastructure business for $900 million to DigiCert have resulted in muted operating margins.

In terms of Starboard’s potential moves to promote value, we would conjecture there are a couple of levers it could pull. First, Starboard could push for a sale of Symantec, although we think Symantec’s enterprise and consumer split would probably be unattractive to other security competitors. Even Cisco, which once had a consumer tilt (through Belkin, for example), has become a pure-play enterprise vendor. Second, Starboard could push Symantec to split into two businesses: consumer and enterprise. However, management has used the profitability of the mature consumer business to fund the higher-growth enterprise business. Third, it would not be outside the realm of possibility that Symantec is a leveraged buyout candidate, particularly as the company could handle its accounting issues in the private market.

The most recent 13-F filing by David Tepper's Appaloosa Management reveals that the company initiated a position in Symantec by acquiring about 3.8 million shares during its second quarter. Given Starboard’s stake, Appaloosa's involvement, and Silver Lake Partners' and Bain Capital's strategic private investments in public equity for $1 billion and $750 million, respectively, there are now a multitude of high-profile stakeholders in Symantec, some of which are activists and probably have differing agendas. Silver Lake and Bain have representatives on Symantec's 11-person board of directors.

We reiterate that while the stakeholders can pull levers in an attempt to create value for shareholders, Symantec is still contending with entrenched competitors on the enterprise side and secular headwinds on the consumer side (freeware, an inability to monetize endpoint security on mobile and Internet of Things devices, and security measures being automatically implemented in the operating systems and browsers for PC devices).

Our stewardship rating for Symantec is now Poor. While we were inclined to give a pass to the new management team brought in with the Blue Coat acquisition, the internal audit investigation has eroded our confidence. We believe the delay of the 10-K filing and reduced guidance are indicative of poor stewardship of shareholder capital.