Activist + private equity = no M&A for Symantec

February 5, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Symantec’s future dealmaking ambitions have been squashed. The $14 billion U.S. internet security group just netted $5.3 billion in cash from selling its Veritas unit to Carlyle and others. Pressured by activist investor Elliott Management, it’s now borrowing an extra $500 million from private equity firm Silver Lake and returning all the cash to shareholders rather than adding to its war chest as the company had planned.

In August, Symantec agreed to sell Veritas, its data-storage business, for $8 billion. The expected after-tax cash proceeds were $6.3 billion. The company said it planned to return about a third of that to investors in the 18 months following the completion of the deal. That would have left a sizeable amount of cash for potential dealmaking by Michael Brown, the chief executive.

Yet Symantec’s M&A track record is questionable, and Exhibit A is Veritas itself. Symantec paid $13.5 billion for the unit about a decade ago and, even after agreeing to a sale for more than $5 billion less, had to accept a reduced $7.4 billion price from Carlyle and its partners last month after stumbling over the separation of the business from its own. Other acquisitions haven’t obviously added value, either. Despite more than two dozen purchases in the past 10 years or so, Symantec’s stock has underperformed the S&P 500 Index.

All of this seems to have led investors, including Elliott, to demand the company puts the temptation of any more significant acquisitions out of reach. Symantec acquiesced in Thursday’s announcement, pledging to return a hefty $5.5 billion to investors by the end of March 2017 in buybacks and dividends. That’s nearly three times as much as initially planned, and months earlier.

Since a chunk of Symantec’s cash is overseas and would incur U.S. taxes upon repatriation, Silver Lake’s investment will help ensure the payouts can be made in a tax-efficient manner – and at a relatively low cost, as the investment is in the form of a convertible bond with just a 2.5 percent coupon. The tech-focused buyout firm will also get a representative on Symantec’s board. That will help ensure that the company gets its existing business in order before rediscovering any wider ambition.

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