cnbcs192

 

No Security for Network Associates’ Shareholders

 


By Hal Plotkin
CNBC.com Silicon Valley Correspondent

Dec 27, 2000 03:21 PM


Chart: 1-year performance of NETA
One-year performance of Network Associates’ stock.

Network Associates Inc. {NETA} took a bloodbath today after last night’s news that the company has a big accounting problem, will post a fourth-quarter loss, and is jetisonning its top three executives. Shocking, yes–the shares traded down 70% on the news. But completely unpredictable? Not necessarily.

While the company blamed stuffed sales channels and a slowing economy for the poor performance, others put the blame squarely on what they say was a poorly executed and perhaps misguided attempt by Network Associates to significantly broaden its footprint in the online security market. In 1998, Network Associates spun off its consumer-oriented anti-virus operation, McAfee.com Inc. {MCAF}, into a separate company in which Network Associates retains an 83% stake.

The stated goal of the partial divestiture, beyond raising cash, was to allow Network Associates to focus on the supposedly more lucrative corporate market, which it hoped to crack with a suite of services that include the full range of online security solutions, including intrusion detection, virus protection and authenticating users. But that move–from a sharp focus on the PC antivirus software market–to a diffuse soup-to nuts strategy–has never seemed smart to many sofware-industry observers.

Network Associates wasn’t the only company in the business to have to make some adjustments. Rival Symantec Corp. {SYMC}, for instance, recently announced a move to a new marketing model.

CNBC.com: Symantec Charts New Course

The problem for Network Associates, however, is that every online security niche relies on expertise in specific technologies. Staying current in all those different areas usually requires vastly different technical skill sets that often can’t be found in any one company. For that reason, many seasoned observers have been saying for some time that the future, at least the immediate future, belongs to the so-called best-of-breed players that focus all their attention and research and development on owning just one online security niche.

CNBC.com: Crime Pays for Online Security Firms

“The companies that have tried to do it all have failed miserably,” says Sean Jackson, an analyst who covers online security stocks for SunTrust Equitable Securities, based in Nashville, Tennessee.

“Online security is only as good as the weakest link in the chain,” says Jackson. “No one vendor has been able to consolidate all the different functions.”

More recently, Network Associates attempted to respond to those concerns by chopping up its short-lived and highly touted comprehensive online security operation into five separate business units that its now departing executives said would help the firm better focus on individual market niches. The hope was those divisions would perform better individually than they had as a whole.

As the numbers now attest, they didn’t.

Meanwhile, Network Associates has been falling behind in key areas. It had been the leading seller of corporate online security solutions for three years running, capturing 47% of the market in 1999, according to a report released this Fall by International Data Corp. But a newly reinvigorated Symantec is coming on strong and systems integrators have been recommending best of breed products to their clients, rather than Network Associates’ one-stop shop.

Yesterday’s revelations only confirm what the experts were saying about the company’s over-reaching plans. The company now says it will lose as much as $150 million in the fourth quarter–not the 31 cents per share profit that analysts polled by First Call Corp. had been expecting. Chairman and CEO William Larson is gone while President Peter Watkins, and Chief Financial Officer Prabhat Goyal are staying on only until their replacements have been named.

When the new team signs on, cleans up the accounting mess, and lays out a new strategy, investors may start to feel secure about Network Associates.

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