A battle royale is set to break out in the SMB storage market between EMC and Symantec-owned Veritas. now At stake is a multi-billion dollar share of the storage backup market.
Veritas is on top at the moment, but EMC is getting ready to hit them smack in the guts with a combination of hardware and software solutions.
For Veritas, the problem is their new owners Symantec, with many pundits tipping that the deal will impact the company significantly. Investors are already voting on the deal by ripping millions of dollars worth of value out of the company, and common sense would suggest that there are few synergies to be had between a company whose main business is protecting desktop computers from viruses, and one whose bread and butter is the backup of business data. But Symantec’s acquisition of Veritas for $13.5 billion is a move that will create the world’s fourth largest software supplier.
The acquisition comes just when EMC (under the leadership of CEO and president Joe Tucci) is further flexing its storage muscles with a move into the SMB storage market through the acquisition of Dantz – makers of the highly successful Retrospect backup software. This, the market says, is a far more palatable deal, as it will allow the IT channel to sell both hardware and software from the same company.
When EMC acquired Dantz, the market took the shares up but this cannot be said for Symantec. Criticism of the Veritas deal came hard and fast. Symantec shareholders showed their displeasure, driving the companies stock down by a quarter, from about $33 before the deal was announced on December 16, 2005 to about $25 soon after. The crash prompted Symantec chairman and CEO John Thompson to state: “I don’t understand the haircut we got, I just don’t.” But at the time of writing Symantec’s stock has fallen further still, to just over $22. So the question is this: were Symantec’s shareholders right to be spooked by this deal, or do they simply not understand Thompson’s vision? Or does the market – and in particular the IT channel – see the EMC solution for the SMB storage market as being a better proposition?
One company that was evaluating the potential acquisition of Veritas at the time Symantec snapped up the deal was HP, and insiders now say that the failure of Carly Fiorina to acquire Veritas was one more reason for her sacking.
Symantec and Veritas are two similarly-sized companies and are dependent on the SMB market for their success, and while they operate in very different markets, the same reseller and solution provider is selling their products.
Although both companies have a history of strong growth, they both face long-term challenges for their survival. Symantec mostly supplies anti-virus and firewall software, and half of its business is with consumers. Veritas sells storage management software, and virtually all of its customers are businesses. But, they argue that the proposed stock-swap merger – worth around $13.5billion – will not only give the two the size they need to survive in a consolidating IT market, but will combine two sets of products that belong together.
The deal has seen Symantec’s Thompson take the reins as CEO of the combined entity, with former Veritas CEO Gary Bloom taking a secondary role as a co-president and vice chairman responsible
for sales, service and support.
It was not only Symantec’s stockholders who were critical of the deal, so too were a number of analysts. Several brokers cut their assessments of Symantec’s potential stock performance on the announcement of the deal. For example, Credit Suisse First Boston offered a critical view of the merger plan: “Although Symantec will possess a much broader product portfolio when merged with Veritas, we are concerned that the combined product set in its present status does not form a truly holistic infrastructure management solution that offers comprehensive visibility across the IT infrastructure, which could provide cross-selling leverage and increase growth rates for both companies’ core businesses.”
The broker hit on a key question: does this merger offer up any real synergies? Does it create new and improved opportunities for the combined entity, or should we expect each company’s sales trajectories to remain the same?
The answer from one specialist storage analyst, Taneja Group, was less than comforting for Thompson and Bloom. Senior analyst Alex Gorbansky told CBR that he is overwhelmingly “negative” on the proposed acquisition. He said it does not hold the potential for strong synergies for either company: “What one looks for in a deal of this size is for one plus one to equal three, and I can’t see that is the case here. One company is security, the other is data management and infrastructure. The potential for cross-bundling and cross-selling the software is not immediately apparent.”
Another analyst told SHR: “EMC are in a box-seat to take market share away from Veritas. They have solutions for the SMB market with Retrospect. This is ideal for the sub-75 user market who are buying Microsoft’s small business server. For anything above that they have Legato. Veritas can only go down from here.
“Also working for EMC is the Dell relationship. While there are some issues with who owns what market, the Dell factor is contributing to EMC’s bottom line. Dell will recommend Retrospect not Veritas, however this does not stop a Dell customer choosing Veritas over Retrospect in the SMB market.”
So what are the synergies claimed by Symantec and Veritas that many analysts are struggling to identify? Veritas’s Bloom said the company would initially look at bundling opportunities and “loosely coupled” integration. Deep product integration will also happen, but will take longer, he added.
The CEOs said there was a “great packaging opportunity to deliver a complete environment for [Microsoft’s messaging server] Exchange”, where Symantec provides email security and Veritas recently acquired archiving capabilities.
However, Alex Gorbansky is unimpressed by the idea of an integrated security and storage management product targeted at Microsoft’s Exchange environment. Asked whether it could work, he said, “I suppose it could, but is that really something that two multi-billion dollar companies get together for. Why not just do it as a joint partnership?”
There was one positive note to Gorbansky’s take on the deal. He said Veritas stockholders are at least getting a premium for their shares.
A big threat on Symantec and EMC’s horizon is Microsoft. Microsoft is hovering on the edges of the security market, and when it takes the plunge, there will be a lot less water left for EMC or Symantec or any of the other security incumbents. However, EMC does have hardware to fall back on, whereas Symantec relies on hardware partners.
Microsoft’s security initiative, Trustworthy Computing, is around three years old, but until recently the only public face of the strategy was the patches and technologies released to make existing Microsoft products more secure. But, late last year, the company began giving away personal firewall software as part of Windows XP Service Pack 2, a security-focused upgrade to XP. That alone could burn a big hole in Symantec’s revenue.
Potentially even more damaging would be Microsoft’s entry into the anti-virus market. Microsoft lined itself up to do this in 2003 when it bought GeCad, a Romanian anti-virus software developer. One issue that may have been holding the company back from bundling this software with Windows is the risk of provoking yet more anti-trust legal action. The other is the complexity and scale of support needed for anti-virus products.
Symantec can, however, see the inevitable coming. Its CEO John Thompson recently said: “I’m not totally sure what the packaging and pricing is going to be, but it is clear they [Microsoft] intend to enter the market at some point.”
How quickly Symantec and Veritas are able to merge their product lines, sales forces and marketing strategies will play a key role in whether this merger succeeds or fails. There have been mixed reactions to the deal from analysts, but Symantec’s stock slide suggests that a great many shareholders are not convinced of the logic. They started abandoning the stock even before Symantec was able to explain its motivation for the deal and, while the Symantec Veritas is being debated, EMC’s stock has continued to climb with more acquisitions tipped in coming months.