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How Symantec really grew.

The prospectus for Symantec Corp.'s long-awaited public offering showed up last week, unveiling a few secrets of one of the industry's most closely-watched ventures. Wall Street is bound to pay particularly close attention to Symantec's valuation--which, based on a projected offering price of $10.50 a share, works out to be about $60 million. That's fairly aggressive: Symantec's sales last year were $39.9 million, and so far the company has logged only three profitable quarters and carries an accumulated deficit of $10.8 million.

Still, Symantec's underwriters presumably know what they're doing. If the offering goes through at $10.50 or so and the aftermarket price holds firm, the Symantec IPO should provide another encouraging bit of evidence that software companies can be reasonable places to park money.

To us, however, the Symantec prospectus is even more interesting for what it reveals about the company's growth strategy. Over the years, we've come to think of Symantec as the software equivalent of a snowball rolling downhill. In 1987 alone, Symantec gobbled up three smaller companies--Breakthrough Software (Time Line), Living Videotext (More), and Think Technologies (Lightspeed Pascal and C). In pursuit of a broader product line, Symantec has also picked up marketing rights to an outliner, various spreadsheet add-ons, and two Macintosh utilities.

In short, Symantec looks like a classic example of broad-based growth by acquisition--exactly in line with the "consolidation" trend that's supposed to be sweeping the software industry.

Except that's not what actually happened. Despite its acquisitions, Symantec is still basically a two-product company; its real growth engines are Q&A (an internally developed product) and Time Line (which experienced its greatest growth surge after Symantec acquired it).

These two products account for fully two-thirds of symantec's current revenues; all of the company's more recent acquisitions and publishing deals have added only another one-third.

The prospectus doesn't break out profit and growth by product, but we suspect that Symantec's portfolio of small products also makes a relatively small contribution to current growth and income. When Symantec bought Living Videotext, LVT had just earned $612,000 in profits on $4.2 million in sales. Think made an even smaller contribution: $2.3 million in sales, with a $1.1 million loss the previous year. Symantec's Turner Hall subsidiary--originally formed to publish add-ons and utilities--is now basically defunct, and the rollouts of More II and GrandView have gotten off to a sluggish start.

We don't mean to suggest that Symantec's long-term acquisition strategy is flawed; in fact, the company probably has been wise to focus on young companies and emerging technologies, rather than try to pick up mature products that might provide an immediate revenue boost. (The experience of Ashton-Tate, Software Publishing Corp., Borland, and others Buggests that buying mature products is a lot riskier than it seems.)

But the Symantec experience does suggest that growth by acquisition can be an expensive process. Besides the cash and stock that Symantec invested in purchasing its product portfolio, the company has ended up with ongoing R&D expenses and royalties (included in cost of revenues) that are substantially above industry averages: Net revenues* $ 39,886,000 100%

Research & development 6,385,000 16% Sales & marketing 14,795,000 37% General and administrative 5,285,000 13% Cost of Revenue 9,337,000 24% Of course, by investing in a diversified portfolio, Symantec has substantially improved its opportunities for discovering another winner like Time Line. But acquisitions are supposed to do more than just improve a company's odds; according to the popular wisdom, acquisitions take most of the guesswork out of product development and market testing. If Symantec's experience is typical--and we think it is--then the popular wisdom is wrong again.
COPYRIGHT 1989 Soft-letter
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Copyright 1989, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Date:May 1, 1989
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