Internet security major Symantec Corporation (SYMC) recently offloaded 50.0% of its stake in the Hong Kong-based joint venture, Huawei Symantec. Symantec expects to generate transaction proceeds worth $530.0 million, which is below the market expectation.
The joint venture dates back to 2007, when after several rounds of negotiations, Huawei and Symantec announced the establishment of the joint venture company Huawei Symantec on May 15th, 2007. Huawei Symantec, however, became operational on February 5th, 2008 following after acquiring the necessary regulatory approvals. Since then, Huawei Symantec has operated successfully in the security and network storage sector.
But things have changed over the years, as the recent deal offers a win – win situation for both the companies. This stake disposition will allow Huawei to boost its product portfolio for enterprise customers as the product line of the two companies are identical. Moreover, this will also help Symantec to improve its bottom line by offloading a shrinking business.
The deal is subject to regulatory approvals in the United States, but some industry experts believe that challenges will be limited, since Huawei Symantec was based in Hong Kong and Huawei already owns the majority stake.
The original joint venture agreement included a condition specifying that one of the companies would eventually take control of the three-year-old venture. The joint venture is a better fit to Huawei’s business model, as the latter has a proper team in place with the required expertise to run the business successfully. Moreover, the joint venture has witnessed a loss over the last three years and has been a drag on Symantec’s earnings. So it makes perfect sense for the company to offload it.
Symantec reported decent second quarter 2012 results and provided optimistic third quarter 2012 guidance. Given its significant share in the fast-growing security market and its innovation of new products, we believe Symantec will be able to capitalize on the vast opportunities in the security market.
On the other hand, the reduction in tech spending by different government and private organizations make us a bit apprehensive. Moreover, the current economic turmoil in Europe may also dampen the company’s business prospects in that region. This apart, intense competition from other players such as Kaspersky Lab, coupled with the enhanced security offered by Microsoft Corp.’s (MSFT) new Windows operating systems may hinder margin expansion to a certain extent.
Currently, Symantec has a Zacks #3 Rank, implying a short-term Hold rating.
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