updated 12/16/2004 4:59:50 PM ET 2004-12-16T21:59:50

Computer security giant Symantec Corp. is buying storage and backup program specialist Veritas Software Corp. to create the world’s fourth largest software maker, underscoring an urge to merge that’s expected to compress the high-tech industry to a few juggernauts.

The all-stock acquisition, announced Thursday, was initially valued at $13.5 billion, but the price quickly plummeted amid investor worries that the deal signals a sales slowdown at Symantec, the maker of the popular Norton-branded software that fights computer viruses.

Even as the stock market puzzled over why Symantec decided to branch outside computer security to buy a slower growing company in Veritas, some analysts praised the deal for creating a more diversified firm better equipped to compete with the likes of Microsoft Corp. and IBM Corp.

With the Veritas purchase, Cupertino-based Symantec hopes to create a one-stop shop that guards against computer viruses and ensures the reams of vital information stored on corporate networks remains accessible.

Both specialties are in high demand as computer hackers become more proficient in exploiting flaws in Microsoft’s Windows operating system and computers become the indispensable information hubs of businesses and households alike.

“This is a profound event for the entire industry,” Symantec CEO John Thompson told analysts during a Thursday conference call. “I think together we will become a very powerful company.”

Investors aren’t convinced. Symantec’s shares plunged $2.46 to $24.92 during Thursday’s trading on the Nasdaq Stock Market, where Veritas’ shares fell 54 cents to $27.57. The decline shaved about $1.2 billion from the deal’s initial value.

American Technology Research analyst Donovan Gow said the market’s negative reaction stems from perceptions that Symantec’s acquisition is being driven by a weakening sales outlook for its security software. Those jitters have been amplified by Microsoft’s expected expansion into the market with its own antivirus program.

“This (deal) doesn’t mean security sales are going to be derailed, but the incredible growth rates (of recent years) may be behind us,” Gow said.

Thompson, who will run the combined company, tried to allay the concerns Thursday. “This is not a defensive move by any stretch of the imagination. It’s an offensive move,” he told analysts.

After the deal closes in next year’s second quarter, Symantec expects to have annual revenue of $5 billion. The only software makers with a higher sales volume are Microsoft, Oracle Corp. and Germany-based SAP.

The deal marks the second blockbuster merger of major software makers this week — a phenomenon widely expected to continue as companies try to adapt to a maturing industry and cater to their customers’ desire to deal with fewer vendors.

The competitive pressures are expected to force high-tech companies to pair off with a compatible mate or risk being trampled by deal-hungry powerhouses that gain more customers and more financial clout with acquisition.

Even as he expressed misgivings about the deal, Prudential Equity Group analyst Michael Turits praised Symantec for making a “bold and likely critical move to ensure (it) can compete long term with large...technology vendors.”

Oracle got the acquisition ball rolling earlier this week with a $10.3 billion takeover of bitter rival PeopleSoft Inc. — a combination that was cinched after 18 months of turmoil.

Unlike the rancor that preceded that transaction, Symantec and Mountain View-based Veritas cordially negotiated their deal during the last three months.

In a joint interview Thursday, Thompson and Veritas CEO Gary Bloom said the talks began with a friendly glass of wine and quickly progressed from there as they shared their similar views about the industry’s direction.

“When you share as much symmetry as we do, things can happen pretty quickly,” said Bloom, who will become the merged company’s vice chairman and president.

Unlike most corporate mergers, relatively few layoffs are expected after the 6,000-employee Symantec and 7,000-employee Veritas join forces.

The divergent markets of the two merging companies makes it unlikely their proposed marriage will encounter the antitrust obstacles that complicated Oracle’s bid for PeopleSoft.

Symantec’s major competitors in the security market include McAfee Inc. and Computer Associates International Inc., while Veritas has been battling with EMC Corp., IBM Corp. and Computer Associates in the data storage and backup field.

The surging sales of antivirus software, coupled with expectations of rapid future growth, has turned Symantec into a hot commodity. The company’s market value had nearly doubled this year before a recent sell-off triggered earlier this week by a news leak of the Veritas talks.

Veritas has been growing at about one-third of the rate of Symantec, Gow said, a disparity that raised a red flag for investors.

Although it’s a leader in its field, Veritas has been dogged with a series of missteps that has damaged its stock, which has fallen by 25 percent this year. While Symantec has emerged as a rising star, Veritas has never regained the luster that it held during the high-tech boom, causing its shares to peak at $174 in early 2000.

Veritas’ recent problems included the revelation of accounting abuses that forced the company to restate its results for 2001 through 2003 and a second-quarter earnings disappointment. In 2002, the company suffered another black eye when it discovered its chief financial officer had lied about his academic background, resulting in the executive’s abrupt resignation.

Symantec is confident Veritas will strengthen its financial performance. Excluding a $300 million writedown to account for Veritas’ deferred revenue, Symantec projected its earnings for the fiscal year ending in March 2006 will be above the mean estimate of 98 cents per share among analyst polled by Thomson First Call.

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