After talks of buying all of Symantec collapsed last month, Broadcom announced Thursday that it will acquire the enterprise security business of the Silicon Valley-based cybersecurity company for $10.7 billion in cash, which is 36 times the enterprise division’s fiscal year 2019 operating income.
“This transaction not only expands Broadcom’s infrastructure software footprint, but also strengthens our position as one of the world’s leading infrastructure technology companies, both in hardware and software,” said Broadcom CEO Hock Tan during the call with analysts discussing additional details about the acquisition. “We plan to incorporate the Symantec brand into the Broadcom portfolio, while Symantec’s consumer business will remain separate and be rebranded.”
Symantec’s enterprise business was not very profitable
Symantec’s enterprise security software and cloud products, which include endpoint protection, data loss prevention, web, network, and email security, as well as cloud application security, generated approximately 50% of the 37 year old company’s revenue, at $2.5 billion, but only 10% of its operating income in the first quarter of fiscal 2020 that ended ended July 5, 2019.
“Think about that for a moment, $10.7 billion in cash for approximately 10% of our operating income,” pointed Rick Hill, Symantec’s interim CEO, in a call with Wall Street analysts on Thursday.
For chipmaker Broadcom, the acquisition of the Mountain View, California-based company’s enterprise business unit as well as its brand—Symantec’s consumer business will be rebranded Norton Lifelock—is the logical next step in its infrastructure software strategy, following the acquisitions of Brocade—maker of data center and enterprise storage networking equipment—and mainframe software company CA, adding the $160 billion cybersecurity market to Broadcom’s addressable market.
“Now, by acquiring this number one cybersecurity franchise, we will gain a portfolio of mission-critical security solutions, which are deeply embedded among our global 2000 customers,” added Tan. “There will be meaningful cross-selling opportunities with brocade, and CA solutions. “We expect Symantec to add more than $2 billion of sustainable run-rate revenues.”
Broadcom’s CEO also expects to achieve 20.9% of its revenue from software and more than $1 billion in run-rate cost synergies within 12 months, after the close of the acquisition. More importantly, this transaction could also provide the opportunity for Broadcom to achieve a financial objective of double-digit cash-on-cash returns on its investment.
Atherton Research Insights
So far, the results of Broadcom’s pivot from semiconductor to software solutions is a mixed bag.
On Thursday, the chipmaker has reaffirmed its $22.5 billion revenue outlook for the fiscal year 2019, ending in November, up from $20.8 billion last year or about 8% growth.
Besides, despite Tan’s enthusiasm, we still don’t see the technology synergies between Broadcom’s semiconductor activities and its new enterprise software infrastructure business.
Unlike Intel which acquired McAfee for $7.68 billion to embed security into its chips, the San Jose, California-based chipmaker has not given any indication that it is pursuing the same strategy than Intel which ultimately failed.
Time will tell.