Broadcom To Buy Symantec's Enterprise Security Business: Symantec Earnings After Bell

Symantec investors have been very sensitive to any news about a potential acquisition as the business has been rocky over the past 5 years. 2018’s topline was 30% below that of 5 years prior, though the last 2 years have seen some bounce back.

This purchase appears offbeat from an outside perspective, but Broadcom is attempting to broaden its scope of business and diversify its portfolio. I believe that this cross-sector acquisition holds synergies that the nimble Hock Tan (Broadcom CEO) plans to leverage in Broadcom’s transition into an infrastructure technology conglomerate.

Symantec’s entire market value is $12.6 billion, and according to the Wall Street Journal’s report, the deal could be valued at $10 billion.

Symantec’s Enterprise segment sells its products to corporations and businesses. This segment makes up more than 50% of the firm’s topline but less than 30% of Symantec’s profits, though the operating margins have improved over the past 3 years.

This could represent a win for both firms. Symantec can get rid of its lower margin enterprise business to focus on its consumer group, selling away less than 30% of its profits for roughly 80% of its total market value. The much larger Broadcom is able to buy out a growing segment with expanding margins which they could leverage with both scale and existing business connections.

The question that AVGO investors need to ponder is whether or not Symantec’s enterprise security business is worth $10 billion to Broadcom and to what degree will the semiconductor company be able to capture synergies from a cybersecurity business?

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Symantec is releasing its earnings after the bell today (July 8^th), and I would expect that management will provide more color for investors in regards to the potential deal with Broadcom.

An Infrastructure Technology Company

This would not be the first of Broadcom’s acquisitions that seemed to fall beyond their scope. Broadcom announced it would be buying CA Technologies, an IT management software & solutions company, for $18.9 billion (23% premium), almost a year ago today.

AVGO plummeted almost 20% on the news that a semiconductor company was acquiring outside of its core competencies. Investors saw a lack of synergies. This ended up being a great buying opportunity with AVGO’s strong rally following this announcement.

Broadcom achieved economies of scope with the CA acquisition. The same scope they will be attaining if they can negotiate a deal for Symantec’s enterprise security segment successfully. Broadcom is evolving from a pure-play semiconductor firm into an infrastructure technology conglomerate, diversifying Broadcom’s revenue drivers as well as broadened its customer based. The cyclicality in the semiconductor space can take a toll on revenue consistency and in turn, valuation metrics.

Broadcom’s move to purchase a cybersecurity company isn’t as big of a shock to investors as the CA deal, with the company already having ventured outside of its perceived scope. Symantec may not have held a place in Broadcom’s portfolio 52 weeks ago, but as the company pivots into an infrastructure technology company, the acquisition makes more sense.

Symantec is one of the largest software security segment in the US but has been struggling in recent years with management turnover becoming a systemic issue. This acquisition comes at a good time for SYMC investors and could be opportune for Broadcom as long as the premium they pay isn’t overly aggressive.

Take Away

Broadcom’s potential purchase of Symantec enterprise security business presents solid long-term investment for AVGO and a tremendous short-term gain for SYMC shareholders. With this deal already fallen apart once, there is potential for another breakdown in negotiations.

Look for further clarity on the deal during Symantec’s earnings call this evening.

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