Investors knocked down the price of shares in McAfee Associates (MCAF) this morning, reacting to a lower recommendation from Goldman Sachs after McAfee and Network General (NETG), announced yesterday that they will merge.
But Network General's stock rose this morning to as high as 25-7/8 before settling back in early afternoon to 24-1/4, up 7/8 from Monday's close on extremely heavy volume of 7.7 million shares. McAfee's stock traded at 60, off 6-3/8, on heavy volume of 4.9 million shares.
Both stocks had risen Monday before the deal was announced following the market's close. Network General shareholders will receive an approximately 16 percent premium over yesterday's closing.
"There are some issues to contend with here [in the $1.3 billion merger]," said Goldman Sachs' Rakesh Sood. "McAfee wants to become an enterprise software player, but this didn't quite do it."
"The merger will play out, that's not the issue. What we're talking about is calling the stock here," Sood added, noting that Network General has been a slow-growth company and suggesting that McAfee stock price has been based on expectations that it would continue its nearly 100 percent annual growth rate.
Under the stock transaction, McAfee, an antivirus and network security software vendor, will swap .4167 of newly issued McAfee shares for each share of Network General, an enterprise networking firm.
If the merger goes through, the new company, called Network Associates, will be the world's largest network security and management software company, and the 10th largest independent software company.
McAfee chief executive William Larson will be chief executive and chairman of the merged operation, while Network General's Leslie Denend will be president.
The merger combines fast-growing McAfee, which has been pushing beyond its niche in antivirus software to become a full-scale security and network-management firm, with a company of almost equal size.
"I like [the deal] pretty well," said John Powers, stock analyst at BancAmerica Robertson Stephens. "It's not an expensive price, and there's lots of product-line synergy in the network management and security areas."
Greg Howard, analyst with Infonetics Research, agreed: "I think they're really poised to be the premier security company. It makes sense, it's very complimentary. I think for end users this is a positive merger."
The two companies have roughly equal revenues; Network General yesterday reported revenues of $64.6 million for the quarter ending September 30, while McAfee said its revenues for the same quarter will be approximately $88.3 million.
Network General yesterday reported a 16 percent increase in revenues over its year-ago period, and net income of $7.8 million, or 18 cents a share, before one-time costs for the acquisition of Cinco Networks. But the $23.6 million charge for the acquisition produced a loss of $15.8 million or 37 cents a share for the quarter, compared with profits of $9.8 million a year ago.
The product lines of the two companies are broadly complementary. Network General markets a combination of software and network interface card (NIC) hardware that analyzes data packets on a network and pinpoints traffic patterns. The technology, dubbed Sniffers by the company, is used by network managers, who increasingly are charged with allocating precious bandwidth on corporate intranets.
Network General recently added software tools to analyze Sniffer data for service-based reports on network availability. It also announced recently the launch of a security tool called CyberCop that detects unauthorized intrusions and alerts administrators.
From its core antivirus business, McAfee has added security software, including a firewall. It also offers a suite of help-desk software to reduce the amount of time MIS spends with users on technical-support issues.
Analyst Powers, noting that McAfee has regularly grown its product line by way of acquisitions, said he thinks the merger will go off largely without any hitches.
"I'm pretty confident in Larson's ability to meld companies," he said.